-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nz9edJFU/esY+KkYtW5WwdDigWyPYW1Bcwb9DInl0yAiHl7xLxFnfv8cx8GCfilJ gO6l/KzxhG93D6M0XJ/egQ== 0000950123-98-003194.txt : 19980401 0000950123-98-003194.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950123-98-003194 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARISA CHRISTINA INC CENTRAL INDEX KEY: 0000923149 STANDARD INDUSTRIAL CLASSIFICATION: KNIT OUTERWEAR MILLS [2253] IRS NUMBER: 133078311 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24176 FILM NUMBER: 98581779 BUSINESS ADDRESS: STREET 1: 415 SECOND AVE CITY: NEW HYDE PARK STATE: NY ZIP: 11040 BUSINESS PHONE: 5163525050 MAIL ADDRESS: STREET 1: 415 SECOND AVENUE CITY: NEW HYDE PARK STATE: NY ZIP: 11040 10-K405 1 MARISA CHRISTINA, INCORPORATED 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 OR [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ____________ Commission File Number 0-24176 MARISA CHRISTINA, INCORPORATED (Exact name of Registrant as specified in its charter) Delaware 11-3216809 - ------------------------ ------------------- (State of Incorporation) (I.R.S.Employer Identification No.) 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601 - ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 758-9800 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 Per Share (the "Common Stock") Indicate by check mark X whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes |X| As of March 6, 1998, the aggregate market value of the outstanding shares of the Registrant's Common Stock, par value $0.01 per share, held by non-affiliates was approximately $25 million based on the average closing price of the Common Stock as reported by Nasdaq National Market on March 6, 1998. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the most recent practicable date.
Class Outstanding at March 6, 1998 ----- ---------------------------- Common stock, par value $0.01 per share 8,159,769 shares
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 2 TABLE OF CONTENTS PAGE ---- Part I Item 1. Business.........................................................1 Item 2. Properties.......................................................7 Item 3. Legal Proceedings................................................8 Item 4. Submission of Matters to a Vote of Security Holders..............8 -- Executive Officers of Registrant.................................8 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................................10 Item 6. Selected Financial Data.........................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................12 Item 8. Consolidated Financial Statements and Supplementary Data........17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................37 Part III Item 10. Directors and Executive Officers of Registrant..................38 Item 11. Executive Compensation..........................................38 Item 12. Security Ownership of Certain Beneficial Owners and Management..38 Item 13. Certain Relationships and Related Transactions..................38 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................................................39 3 PART I Item 1. Business Overview Marisa Christina, Incorporated (the "Company") designs, manufactures, sources and markets a broad line of high quality clothing for women under the Marisa Christina (TM) and Adrienne Vittadini(TM) labels and for children under the Flapdoodles (TM) label. Founded in 1971, the Company had several ownership changes prior to its public offering in 1994. The Company acquired Flapdoodles in 1993 and Adrienne Vittadini in 1996. The Company's business strategy is to: (i) offer distinctive products that reflect consumer preferences, (ii) introduce new products, (iii) expand distribution through new and existing channels, (iv) minimize inventory risk, (v) emphasize customer service, and (vi) add product lines through selective acquisitions. Principal Product Lines Marisa Christina Marisa Christina is best known for its high quality sweaters characterized by classic, timeless styling, unique details, exciting yarns and textures, and special occasion designs. Marisa Christina's product line also includes a selection of other "classic look" garments encompassing knitted and casual sportswear and complementary pieces such as skirts, slacks and jackets, many of which are also produced in petite and large sizes. Suggested retail prices for Marisa Christina products range from $100.00 to $150.00 for a sweater, $60.00 to $90.00 for a specialty T-shirt and $78.00 to $110.00 for a woven skirt or pants. Marisa Christina offers five "lines" per year. Each offering covers various seasons, i.e., fall, holiday, resort, spring and transitional or early fall. Fabrications vary from cotton and linen blends to synthetic and wool blends depending upon the season. Each line consists of approximately 150 different styles organized into twelve to eighteen groupings. These are marketed under four primary labels: Marisa Christina (Classics), Marisa Canvas, Marisa Studio and Christina Rotelli. In addition the Company offers special sizes, which embrace both petite and large sizes, as well as private label and exclusive merchandise. In each selling season, Marisa Christina also offers a selection of complementary blouses, skirts, pants and jackets, which when combined with sweaters, creates complete outfits. The Company estimates that approximately 90% of Marisa Christina customers order complementary pieces, and it is Marisa Christina's policy to ship these orders as a group so that it can create a single, unified display of merchandise. In addition certain designs and colors are designated as exclusive merchandise for customers seeking to differentiate themselves from other retailers by creating broad identity and signature looks. Adrienne Vittadini Adrienne Vittadini sportswear appeals to a wide range of women who look to the designer for more of a casual expression that goes beyond basics to encompass stylish and flattering designs. The Adrienne Vittadini customer base encompasses young women in their middle thirties to more mature women in their sixties. 1 4 The Company positions its product lines into two divisions: the Adrienne Vittadini bridge collection and the Vittadini better-priced line. The bridge collection reflects casual career dressing, athletic-inspired knits as well as sweaters in novelty yarn, stitches and textures. Vittadini is a knitwear-driven, better priced line that includes weekend and weekday dressing alternatives. It includes many of the fashion looks that consumers have come to expect from designer Adrienne Vittadini, combined with high quality and competitive pricing. Adrienne Vittadini has established herself as a "lifestyle designer" and has built a label that is not just about product but about taste level. This has led to various licensing agreements that include swimwear, eyewear, footwear, scarves and home furnishings, among others. Flapdoodles Flapdoodles offers casual yet fashionable clothing for children featuring vibrant colors, all-natural fabrics, unique prints and textile designs. Flapdoodles products consist of infants' and children's sportswear in sizes six months through size 14, swimwear, outerwear and accessories. Five seasons per year are offered and there are deliveries of new style groupings every 30-45 days to ensure a fresh flow of merchandise to Flapdoodles' accounts. Retail prices range from $10-$50 for sportswear, $15-35 for swimwear, $50-$100 for outerwear and $4-$20 for accessories. Within each seasonal offering, the Flapdoodles line consists of between approximately six and fifteen fashion groups. Fashion groups, usually consisting of four to eight styles per group, may be based on special seasonal fabrics, such as novelty knits, yarn-dyed knits and wovens, or jacquards, or based around a specific print theme. These fresh, original print and textile designs are custom developed by Flapdoodles' design staff and then produced according to its specifications. Basics are core styles, such as leggings, turtlenecks, T-shirts, sweatshirts and sweat pants, that are made primarily from Flapdoodles key fabrics, including jersey, rib, fleece and French terry. Because these styles are considered less seasonal, customers tend to maintain inventories of these garments throughout the year. Accordingly, Flapdoodles maintains an inventory of Basics in order to fill customer orders and reorders quickly. Design, Production and Raw Materials Each of the Company's product lines has its own design team, which is responsible for the creation of new and original designs for that product line. The Company believes that its ability to create fresh and original designs while maintaining the "look" of each of its product lines is one of the most important factors to its success. Marisa Christina has a staff of eight designers and merchandisers located in New York City and five merchandisers located in Hong Kong. The staff is divided into independent teams, each of which is responsible for certain labels and for creating several groupings each season, which include knitwear and complementary pieces. As the Company expands its product line to incorporate new design and merchandising concepts, it hires designers with expertise in the new product area. Designers are selected on their experience, their ability to create interesting and original designs, and their expertise in knitting techniques and technology. 2 5 The design staff constantly monitors emerging trends in fashions and popular culture and travels to Europe during the year in order to stay abreast of new designs and trends. The Company also subscribes to design services that summarize fashion trends worldwide. The design process generally requires ten to twelve weeks from the initial concept stage to completion of sample garments for a seasonal offering. The process begins with concept boards, developed by Marisa Christina's design staff, showing style and color ideas. After review by senior executives and sales staff, certain concept boards are selected for further development. From these selections, new boards are created showing detailed designs for garments and, after further review, drawings are selected to be produced as proto-samples. Marisa Christina's merchandisers in Hong Kong work together with manufacturers in executing and correcting all proto-samples. Proto-samples are reviewed by the design staff, as well as senior executives and sales staff, before final showroom samples are created, which generally requires six to eight weeks. Adrienne Vittadini supervises a design and merchandising team of eleven people. Located in New York City, these artists and designers create the styles and inspiration that culminate in a wide variety of clothing and licensed products. A significant amount of research and worldwide travel insure that the latest fashion concepts are reflected in Adrienne's products. The staff is informally divided into three teams. One is responsible for the Adrienne Vittadini bridge collection, another for the Vittadini better line and the third for licensed products. The bridge collection has three offerings per year and the better line opens four times a year. Design concepts are integrated with yarn, fabric color and print ideas and sent to a variety of overseas agents and factories where they are produced as prototype samples. These are reviewed in New York, after which corrections are sent abroad and finished sales samples are executed and returned to the New York sales office. This entire process can take up to four months. In addition, the design staff works closely with all licensees to insure that all products bearing the Vittadini name maintain the high quality and fashion sensibility associated with Adrienne Vittadini. Flapdoodles' merchandising and design staff of eleven people creates all Flapdoodles products. The design team is responsible for all aspects of product development, including fabric research and sourcing, textile and print design, color selection and body and silhouette styling. Flapdoodles selects designers who have the ability to understand and interpret the Flapdoodles concept and a strong appreciation for consumer preferences and market factors. In addition to regularly soliciting feedback from the sales and customer service departments regarding customer and consumer preferences, Flapdoodles designers also stay abreast of fashion and market trends by attending trade shows and subscribing to periodicals and fashion and color forecasting services. This information is then synthesized and incorporated into designs that maintain the unique style of Flapdoodles products. To minimize inventory risk, the Company normally places orders for the production of substantially all Marisa Christina merchandise only upon receipt of customer orders. Flapdoodles' inventory risk is minimized by utilizing the garment-dye process whereby garments are sewn in basic white fabrics and then dyed, allowing Flapdoodles to make commitments to colors later in the selling season after a portion of customer orders have been received. In 1998, AVE intends to adopt similar buying philosophies as those used by Marisa Christina to stabilize margins. This philosophy may adversely affect sales volume. Marisa Christina separately negotiates with suppliers for the purchase of all raw materials required for use by its United States contractors, in accordance with its specifications and based on orders taken for the upcoming season. Raw materials required for use by Marisa Christina's foreign-based contractors are procured by the contractors in accordance with Marisa Christina's specifications. Approximately one-quarter of the garments in the Marisa Christina product line consist of hand-knit sweaters that have been knit in The People's Republic of China and assembled in Hong Kong. 3 6 Adrienne Vittadini sources yarn and fabrics from many different countries including Italy, Japan, Portugal, Turkey, Hong Kong, Korea and China. While most raw materials are purchased directly by Vittadini's overseas manufacturers there are instances when the yarn or fabric is purchased directly by Vittadini. In an effort to minimize inventory risk most orders are placed after market weeks (initial sales presentations to customers) when the Adrienne Vittadini sales staff is able to form judgments concerning the strength of various styles and groupings. The majority of Vittadini products are produced in Hong Kong and China. The Company's operations with respect to Marisa Christina and Adrienne Vittadini products may be significantly affected by economic, political, governmental and labor conditions in Hong Kong and The People's Republic of China until alternate sources of production could be found. Flapdoodles separately negotiates with suppliers for the purchase of required raw materials, in accordance with its specifications. The majority of its products are manufactured in the United States. Management of the Company believes raw materials to be readily available and can be provided from a number of alternative suppliers. Sales and Marketing Marisa Christina has a direct sales force of ten full-time salespersons located in the New York showroom who are compensated on a salaried basis. The direct sales force is responsible for Marisa Christina's large department store and specialty store chain accounts. Marisa Christina also utilizes independent sales representatives who market Marisa Christina products to independent specialty stores and boutiques and are compensated on a commission basis. In some cases, these representatives also market products of other non-competing apparel companies that have been approved by the Company. In addition, Marisa Christina has arrangements with independent distributors in Mexico and Canada that sell to various accounts outside the United States on a royalty basis as well as a licensing arrangement in Japan. Adrienne Vittadini's sales offices are headquartered in New York City. A vice-president of sales and four account executives work with the division's major department and specialty store accounts. Independent sales representatives service regional specialty stores by traveling to the customer and exhibiting at the major markets in Dallas, Los Angeles, Atlanta and Chicago. In addition, five retail specialists work with retailers on product knowledge, implementing in-store shops and special events. A recent special focus on the international market has enlarged Vittadini's presence abroad. Canada, Mexico, Europe and the Pacific Rim are areas presently retailing Adrienne Vittadini products in a meaningful way. Through increased focus and the introduction of licensed products the Company hopes to continue to grow in these markets. National and regional advertising, public relations, in-store shops and personal appearances are some of the methods used to promote the Adrienne Vittadini image. Flapdoodles maintains seven corporate sales offices and showrooms in the following markets: New York, Boston, Atlanta, Charlotte, Dallas, Los Angeles and San Francisco. In addition to the eleven salespeople who staff the showrooms, eight account representatives located at corporate headquarters in Newark, Delaware provide sales and customer service support. Sales to customers are accomplished at either showrooms, national or regional trade shows and market weeks. All sales persons are compensated on a salaried basis with additional bonus compensation based on performance. Flapdoodles also sells to accounts in Canada and Japan through distributors. In order to promote its products, Flapdoodles uses national trade and consumer magazine advertising, in-store posters, gifts-with-purchases and marketing events such as "Flapdoodles Days" and fashion shows. 4 7 Trademarks The Company owns all rights, title and interest in all of its trademarks. Marisa Christina's trademarks are registered in the U.S. Patent and Trademark Office and in the following other countries: Australia, Canada, Dominican Republic, Great Britain, Hong Kong, Israel, Italy, Japan, the Philippines, Switzerland, Venezuela and Mexico. Flapdoodles' trademarks are registered in the U.S., Canada and Japan. Adrienne Vittadini's trademarks are protected in the U.S., Canada and in the following countries: Algeria, Argentina, Australia, Austria, Bahamas, Bahrain, Benelux, Bermuda, Bolivia, Brazil, British Virgin Islands, Chile, China, Colombia, Costa Rica, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Finland, France, Germany, Greece, Haiti, Honduras, Hong Kong, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Lebanon, Malaysia, Mauritius, Mexico, Morocco, New Zealand, Nicaragua, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Portugal, Qatar, Russia, Saint Lucia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Tangiers, Thailand, Trinidad & Tobago, Turkey, United Kingdom, Uruguay, and Venezuela. The Company diligently and vigorously protects its original designs against infringement. Seasonality The Company's business is seasonal, with a substantial portion of its revenues and earnings accruing during the second half of the year as a result of the Back-to-School, Fall and Holiday selling seasons. This is due to both a larger volume of unit sales in these seasons and traditionally higher prices for Fall and Holiday season garments, which generally require more costly materials than the Spring/Summer and Resort seasons. Merchandise from the Back-to-School and Fall collections, the Company's largest selling seasons and Holiday, the Company's next largest season, is shipped in the last two fiscal quarters. Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume selling seasons, is shipped primarily in the first two quarters. In addition, prices of products in the Resort, Spring/Summer and Early Fall collections average 5% to 10% lower than in the other selling seasons. In 1997, net sales of the Company's products in the first quarter were $25.6 million, $19.6 million in the second quarter, $28.4 million in the third quarter and $17.8 million in the fourth quarter. Customers The Company's products are sold in approximately 3,500 individual stores by over 3,000 retailers. Approximately 47% of the Company's 1997 net sales consisted of sales to specialty stores and special store chains, including Talbots and Mark Fore & Strike and 47% consisted of sales to department stores, including Dillards, Federated Department Stores, Saks Fifth Avenue, Profitts and Neiman Marcus. The balance was sold internationally to catalog merchandisers and domestically through ten outlet store locations. In 1997, Saks Fifth Avenue, Dillards, Federated Department Stores and Proffits accounted for approximately 9.4%, 5.9%, 5.2% and 5.1%, respectively, of the Company's net sales and were the only customers that accounted for more than 5% of the Company's net sales. 5 8 Backlog Orders At January 31, 1998, the Company had unfilled customer orders of approximately $21.4 million compared to $33.7 million at the same date in 1997. Because the amount of backlog at a particular time is a function of a number of factors, including scheduling of independent contractors and the shipping orders of the Company's customers, a comparison of backlog from period to period is not necessarily meaningful or indicative of actual sales. In addition, actual sales resulting from backlog may be reduced by trade discounts and allowances. The Company's experience has been that cancellations, rejections and returns of orders do not materially reduce the amount of sales realized from its backlog. Competition The sectors of the apparel industry in which the Company competes are intensely competitive. The Company competes with numerous manufacturers, some of which are larger, more diversified and have greater financial and marketing resources than the Company. The Company competes on the basis of quality, design, price and customer service. Management believes that the Company's competitive advantages are its well-established brand names, reputation for customer service and ability to provide consumers with fresh and original designs. Government Regulation The Company does not expect existing Federal, state and local regulations relating to the workplace and the discharge of materials into the environment to have a material effect on the Company's financial or operating results, and cannot predict the impact of any future changes in such regulations. Employees As of December 31, 1997, the Company employed approximately 383 people, including 11 executives, 120 persons in sales, retail, marketing and advertising, 35 persons in design and merchandising, 55 persons in administration, 81 persons in quality control and finishing and 81 persons in production. The Company hires temporary workers during peak production and distribution periods. All other employees are nonunion and management believes its relations with all employees are good. 6 9 Item 2. Properties The Company's principal executive offices, and the offices of Marisa Christina, are located at 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601. Flapdoodles' principal executive offices are located at 725 Dawson Drive, Newark, Delaware 19713. As of December 31, 1997, the general location, use and approximate size of the Company's principal properties, all of which are leased, are set forth below:
Approximate Location Function Square Footage -------- -------- -------------- North Bergen, New Jersey Marisa Christina and AVE executive offices 8,000 New York, New York Marisa Christina showroom and 15,100 design offices Hong Kong Marisa Christina Production and 2,300 Quality Control offices Newark, Delaware Flapdoodles corporate headquarters, 67,000 distribution center and dyehouse Newark, Delaware Flapdoodles cutting and storage 27,000 New York, New York AVE showroom and design offices 17,000
In addition, Flapdoodles leases seven showrooms of approximately 250 to 2,700 square feet each in the following locations: New York, New York; Los Angeles, California; Boston, Massachusetts; Dallas, Texas; San Francisco, California; Atlanta, Georgia; and Charlotte, North Carolina. Flapdoodles at year end operated ten outlet stores totaling approximately 20,000 square feet located in Woodbury, New York; Lancaster, Pennsylvania; Destin, Florida; Gilroy, California; Orlando, Florida; Dillon, Colorado; Clinton, Connecticut; Dawsonville, Georgia; Riverhead, New York; and Wrentham, Connecticut. Each store is approximately 2,000 square feet. Marisa Christina and AVE have outsourced their receiving, warehousing and shipping functions to a third-party adjacent to their North Bergen facility. Under the outsourcing agreement the Company pays a fixed handling charge per unit with no minimum. Flapdoodles leases its corporate headquarters, distribution center and dyehouse located in Newark, Delaware, from Mr. Marc Ham and Ms. Carole Bieber, officers of the Company. The Company believes that the terms contained in the lease are at least as favorable as could be obtained in an arm's-length transaction from an independent third party. The Company believes that its existing facilities are well maintained, in good operating condition and that its existing facilities will be adequate for the foreseeable future. 7 10 Item 3. Legal Proceedings There are no material pending legal proceedings to which the Company is a party. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Executive Officers of Registrant The following table sets forth the names of the principal executive officers of Marisa Christina, Incorporated, their positions with Marisa Christina, Incorporated, and their principal business experience for the last five years.
Name Age Position ---- --- -------- Michael H. Lerner 53 Chairman of the Board of Directors, Chief Executive Officer and President Marc Ham 35 President of Flapdoodles and Vice Chairman of the Board of Directors Adrienne Vittadini 54 Chairman of Adrienne Vittadini Enterprises, Inc. and Director Gianluigi Vittadini 59 Vice Chairman of Adrienne Vittadini Enterprises, Inc. and Director G. Michael Dees 44 Executive Vice-President of Design and Merchandising of Marisa Christina and Director Carole Bieber 43 Executive Vice-President and Design Director of Flapdoodles Christine M. Carlucci 40 Vice-President of Administration and Operations, Secretary and Director S. E. Melvin Hecht 63 Chief Financial Officer, Treasurer and Director
Michael H. Lerner joined Marisa Christina in August 1986, and has served as Chief Executive Officer, President and Chairman since that time. Prior to joining Marisa Christina, Mr. Lerner was President of TFM Industries, Inc. ("TFM"), a maker of moderate priced sportswear. He is also a director of Apparel Ventures, Inc. an affiliate of The Jordan Company. Marc Ham joined Marisa Christina as a Director in July 1993 and as Vice Chairman in 1997 in connection with the Flapdoodles acquisition and serves as President of Flapdoodles. Mr. Ham, together with Ms. Bieber, co-founded Flapdoodles in 1985 and has served as its president since that time. 8 11 Adrienne Vittadini joined the Company in January 1996 and serves as Chairman of Adrienne Vittadini Enterprises, Inc. Mrs. Vittadini co-founded Adrienne Vittadini, Inc. with her husband, Gianluigi, in 1979 and has acted as Chairman since that time. Prior to this, Mrs. Vittadini was employed in the design field by Kimberly Knitwear and Warnaco. Gianluigi Vittadini joined the Company in January 1996 and serves as Vice Chairman of Adrienne Vittadini Enterprises, Inc. Mr. Vittadini co-founded Adrienne Vittadini, Inc. with his wife, Adrienne, in 1979 and has acted as Vice Chairman and Treasurer since 1983. Prior to that time, Mr. Vittadini served as President of Institute Chemioterapico Italiano in Milan, Italy. G. Michael Dees joined Marisa Christina in September 1986 and has served as a Director of the Company and Executive Vice-President of Design and Merchandising of Marisa Christina, since that time. Prior to joining Marisa Christina, Mr. Dees was Divisional Merchandise Manager of ladies' sportswear for Belk Stores, Inc. Carole Bieber joined Marisa Christina in July 1993 in connection with the Flapdoodles Acquisition and serves as Executive Vice-President and Design Director of Flapdoodles. Ms. Bieber co-founded Flapdoodles in 1985 and has served as its Executive Vice-President and Design Director since that time. Christine M. Carlucci joined Marisa Christina in September 1986 and served as a Vice-President and Chief Financial Officer until December 1993, and has served as the Vice-President of Administration and Operations since that time and is the Secretary and a Director of the Company. Prior to joining Marisa Christina, Ms. Carlucci was an associate of Mr. Lerner at TFM. S.E. Melvin Hecht, C.P.A., joined Marisa Christina in December 1993, and has served as Chief Financial Officer and Treasurer since that time. From 1978 until 1991, Mr. Hecht was a partner at Hertz, Herson & Company, certified public accountants and, since 1991, has served as a financial consultant to various companies. Prior to 1978, Mr. Hecht was a partner at Touche Ross & Co. 9 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded over-the-counter and is quoted on the Nasdaq National Market under the symbol ("MRSA"). The table below presents the high and low bid prices for the Common Stock for each quarter during the two years ended December 31, 1997. The quotations in the table represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
1996 ------------------ Quarter High Low ------- ---- --- First 22-1/8 14-7/8 Second 29-1/4 19-1/2 Third 20-1/8 8-3/4 Fourth 9-7/8 6-1/2 1997 ------------------ Quarter High Low ------- ---- --- First 10 7-3/4 Second 11-3/8 9-1/4 Third 8-1/2 5 Fourth 7 4-1/8
The Company has not paid and does not anticipate paying any cash dividends on the Common Stock for the foreseeable future. From time to time, the Board of Directors intends to review the Company's dividend policy. Any payment of dividends will be at the direction of the Board of Directors and will be dependent on the earnings and financial requirements of the Company and other factors, including the restrictions imposed by the General Corporation Law of the State of Delaware and such other factors as the Board of Directors deems relevant. The number of shareholders of record of the Company's Common Stock as of March 6, 1998, was 57. The Company believes there are in excess of 1,000 beneficial holders of the Company's Common Stock. On December 14, 1994, the Company announced an open market purchase program for its Common Stock. The Company has purchased 402,000 shares of Common Stock pursuant to this program. 10 13 Item 6. Selected Financial Data (in thousands, except per share amounts)
Years ended December 31, 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Net sales $ 56,932 $ 76,213 $ 86,763 $115,537 $ 91,400 Gross profit 21,932 31,612 34,694 39,952 20,164 Selling, general and administrative expenses 13,412 17,909 19,474 29,468 30,002 Restructuring costs -- -- -- -- 1,263 Operating earnings (loss) 8,520 13,703 15,220 10,484 (11,101) Earnings (loss) before income tax expense (benefit) 8,152 13,924 16,634 11,920 (8,980) Income tax expense (benefit) -- -- 6,486 4,543 (2,988) Net earnings (loss) -- -- 10,148 7,377 (5,992) Pro forma income tax expense (1) 3,342 5,470 -- -- -- Pro forma earnings before extraordinary item (1) 4,810 8,454 -- -- -- Pro forma net earnings (1) 4,810 8,161 -- -- -- Per share amounts: Basic earnings (loss) per share -- -- 1.20 .87 (.72) Diluted earnings (loss) per share -- -- 1.20 .86 (.72) Pro forma basic and diluted earnings before extraordinary item per share (1) .86 1.20 -- -- -- Pro forma basic and diluted earnings per share (1) .86 1.16 -- -- -- Supplemental pro forma basic and diluted earnings per share (1)(2) -- 1.12 -- -- -- Weighted average shares outstanding Basic 5,563 7,062 8,434 8,494 8,369 Diluted 5,563 7,089 8,461 8,552 8,369 December 31, 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Working capital $ 7,478 $ 25,147 $ 35,788 $ 17,626 $ 11,941 Total assets 21,403 40,709 54,009 66,200 65,197 Long-term debt 8,500 -- -- -- -- Stockholders' equity 7,204 36,072 46,223 54,215 47,195
- ---------- (1) In connection with the Company's reorganization on June 22, 1994 Marisa Christina ceased to be an "S" Corporation and Flapdoodles ceased to be taxed as a "Limited Liability Company." The pro forma amounts present the Company's results of operations as if Marisa Christina and Flapdoodles had been taxed as "C" Corporations for all periods presented. (2) Supplemental pro forma earnings per share is based upon the weighted average number of common shares used in the calculation of pro forma earnings per share (7,062,000) plus the weighted average number of shares (252,000) sold by the Company in the initial public offering, at $13 per share, necessary to fund the Company's $6.9 million cash distribution of previously taxed "S" Corporation earnings. 11 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overview Results for 1997 were below historical levels. While Flapdoodles continued its growth and strong profitability, 1997 results were adversely impacted by weaker sales and customer demand at the Marisa Christina (MC) and Adrienne Vittadini (AVE) divisions. Sales for 1997, as well as bookings for the Cruise and Spring 1998 seasons at both its MC and AVE divisions are disappointing, which negatively impacted results for 1997 and will adversely impact results for at least the first two quarters of 1998. In addition, because the Company's customers experienced weaker demand at the retail level, the Company had to provide additional markdown allowances, as well as provisions for losses on excess purchase commitments for Cruise and Spring 1998 merchandise. The combination of these factors resulted in the Company recording a fourth quarter charge of approximately $8 million for inventory and markdown reserves. In addition, the decline in operating results of the AVE division required management to evaluate the future prospects of the division to determine if there has been any impairment in the goodwill recorded in the acquisition of the AVE division in January 1996. Based on management's current plans for the AVE division, it expects to be able to fully recover its investment in goodwill from undiscounted cash flows over the estimated remaining life of the goodwill. However, management will continue to evaluate impairment throughout 1998 on a routine basis. Management attributes the decline in operating results primarily to the changes in consumer habits and a shift in the buying patterns of major department stores to favor a smaller number of suppliers with very large name brands. In response to these challenges, the Company instituted a set of initiatives to strengthen its management team as well as cut costs and streamline operations. These initiatives, some of which resulted in non-recurring charges during the fourth quarter of 1997, included (i) the hiring of a president and a new vice president of sales for the Adrienne Vittadini division (ii) the hiring of a new vice president of sales for the Marisa Christina division and (iii) the consolidating of the administrative and warehousing facilities of Adrienne Vittadini and Marisa Christina. Results for 1997 include the expenses with respect to these initiatives of approximately $1.5 million including costs associated with executive search firms, the consolidation of warehouses, severance costs, including settlement of union related issues, and other related matters. Annual cost savings resulting from the consolidation of the two administrative and warehousing facilities could reach approximately $800,000. Management expects that the combination of the new management team members, the consolidation of the Adrienne Vittadini and Marisa Christina administrative and warehousing facilities and the efforts to limit inventory and markdown exposure will enable the Company to improve its operating results in 1998. 12 15 The following table sets forth information with respect to the percentage relationship to net sales of certain items in the consolidated statements of operations of the Company for the years ended December 31, 1995, 1996 and 1997.
1995 1996 1997 ----- ----- ----- Net sales 100.0% 100.0% 100.0% ----- ----- ----- Gross profit 40.0 34.6 22.1 Selling, general and administrative expenses 22.5 25.5 32.8 Restructuring costs -- -- 1.4 ----- ----- ----- Operating earnings (loss) 17.5 9.1 (12.1) Other income, net 0.8 2.0 2.8 Interest (expense) income, net 0.8 (0.8) (0.5) Income tax expense (benefit) 7.4 3.9 (3.2) ----- ----- ----- Net earnings (loss) 11.7% 6.4% (6.6)% ===== ===== =====
Year ended December 31, 1997 compared to year ended December 31, 1996 Net sales. Net sales decreased by 20.9% from $115.5 million in 1996 to $91.4 million in 1997. This decrease was primarily attributable to a significant decline in the sales at the MC and AVE divisions principally due to the poor retail environment for women's apparel as well as extremely poor acceptance of the fall and holiday lines at the retail level. This decline was partially offset by increased sales at the Flapdoodles division. Gross profit. Gross profit decreased 49.5%, from $40.0 million in 1996 to $20.2 million in 1997. As a percentage of net sales, gross profit decreased from 34.6% in 1996 to 22.1% in 1997. The decline in gross profit was attributable to lower margins due to markdowns at the MC and AVE divisions as a result of the poor demand for the divisions' products at the retail level as well as write-downs of approximately $2.6 million for inventory on hand and committed to for the Fall 97, Holiday 97 and Spring 98 seasons. Selling, general and administrative expenses. Selling, general and administrative expenses increased 1.7%, from $29.5 million in 1996 to $30.0 million in 1997. During 1997 the Company increased advertising expenses at the AVE and MC divisions by approximately $1.3 million. The Company anticipates returning to 1996 advertising levels in 1998. As a percentage of net sales of the Company, selling, general and administrative expenses increased from 25.5% in 1996 to 32.8% in 1997. This increase in percentage is primarily attributable to the decreased volume of sales without a proportionate corresponding decrease in expenses. Restructuring costs. Restructuring costs represents certain charges related to the Company's administrative and warehouse consolidation of the AVE and MC divisions. Other income, net. Other income, net consists of royalty, licensing and copyright infringement income. Other income increased 10.4% from $2.3 million in 1996 to $2.5 million in 1997. This increase is attributed to increased licensing revenue earned by the AVE division. Interest (expense) income, net. Interest (expense) income, net decreased 49.6%, from $857,000 in 1996 to $410,000 in 1997 primarily due to a decrease in average outstanding debt and slightly lower interest rates. 13 16 Income tax expense (benefit). Income tax expense (benefit) decreased from $4.5 million expense in 1996 to $3.0 million benefit in 1997 as the result of the significant loss incurred in 1997. The Company's effective income tax (benefit) rates for 1996 and 1997 were 38.1% and (33.3%), respectively. In computing income taxes for 1997, management provided a valuation allowance of approximately $700,000 with respect to certain state net operating loss carryfowards. Net earnings (loss). Net earnings (loss) declined from net earnings of $7.4 million in 1996 to net loss of $6.0 million in 1997 as a result of the lower net sales and gross margins achieved by the MC and AVE divisions, as well as the restructuring costs incurred in 1997. Year ended December 31, 1996 compared to year ended December 31, 1995 Net sales. Net sales increased 33.1% from $86.8 million in 1995 to $115.5 million in 1996. This increase was primarily attributable to $39.2 million of sales by the AVE division, which was acquired in January 1996, and increased sales by Flapdoodles primarily as the result of new private label accounts. Sales by the MC division declined significantly in the year principally due to the poor retail environment and lower demand for the Company's fall and holiday classic times in 1996. Gross profit. Gross profit increased 15.3% from $34.7 million in 1995 to $40.0 million in 1996. Gross profit as a percentage of net sales decreased from 40.0% in 1995 to 34.6% in 1996. The decline in the gross profit percentage for the year was attributable to lower margins due to markdowns at the MC division as a result of the poor retail environment for this division's products. Selling, general and administrative expenses. Selling, general and administrative expenses increased 51.3% from $19.5 million in 1995 to $29.5 million in 1996. Selling, general and administrative expenses related to the AVE division represent $10.7 million of the increase. These expenses increased as a percentage of net sales from 22.5% in 1995 to 25.5% in 1996. This increase is primarily attributable to the amortization of $1.3 million of goodwill recorded in the AVI acquisition and the decreased volume of sales without a corresponding decrease in expenses. Other income, net. Other income consists of royalty, licensing and copyright infringement income. Other income increased by $1,593,000 in 1996 compared to 1995 as the result of the AVE division, which had net royalty in come of $1,959,000. Income from copyright infringement cases declined by approximately $411,000 to $37,000. The timing and amounts of settlements of such cases are not predictable and, accordingly, the Company is unable to predict the amount of future income from this source, if any. Interest (expense) income, net. Interest (expense) income, net changed from an income of $714,000 in 1995 to expense of $857,000 in 1996 as a result of less cash available to invest due to the AVE acquisition as well as interest expense related to bank loans. Income tax expense (benefit). Income tax expense (benefit) decreased from $6.5 million in 1995 to $4.5 million in 1996 as the result of lower earnings. The Company's effective income tax rate for 1995 and 1996 was 39.0% and 38.1%, respectively. Net earnings (loss). Net earnings (loss) declined by 27.3% as a result of the lower net sales and gross margins achieved by the MC and AVE divisions together with higher financing costs resulting from the acquisition of AVE. The MC decline was partially offset by higher income at the Flapdoodles division and the income from the AVE division. 14 17 Seasonality The Company's business is seasonal, with a substantial portion of its revenues and earnings accruing during the second half of the year as a result of the Back-to-School, Fall and Holiday selling seasons. This is due to both a larger volume of unit sales in these seasons and traditionally higher prices for Fall and Holiday season garments, which generally require more costly materials than the Spring/Summer and Resort seasons. Merchandise from the Back-to-School and Fall collections, the Company's largest selling seasons and Holiday, the Company's next largest season, is shipped in the last two fiscal quarters. Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume selling seasons, is shipped primarily in the first two quarters. In addition, prices of products in the Resort, Spring/Summer and Early Fall collections average 5 to 10% lower than in the other selling seasons. Liquidity and Capital Resources The Company has line of credit facilities with two banks, aggregating $35,000,000, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the credit facilities are secured by the Company's accounts receivable and imported inventory and bear interest at the prime rate or LIBOR plus 1% at the Company's option. As of December 31, 1997, $6,500,000 of borrowings and $3,350,000 of commercial letters of credit were outstanding under the credit facilities. At December 31, 1997, available borrowings under the facilities were $25,147,000. The agreement expires on June 30, 1998 at which time management expects it to be renewed. During 1997, the Company had capital expenditures of approximately $1.3 million, primarily to upgrade warehouse and computer systems. During 1998, the Company has planned capital expenditures of approximately $500,000 primarily to upgrade computer systems and open new outlet stores. These capital expenditures will be funded by internally generated funds and, if necessary, bank borrowings under the Company's line of credit facilities. The Company believes that funds generated by operations, if any, and the line of credit facilities will provide financial resources sufficient to meet all of its working capital and letter of credit requirements for at least the next twelve months. Exchange Rates Although it is the Company's policy to contract for the purchase of imported merchandise in United States dollars, reductions in the value of the dollar could result in the Company paying higher prices for its products. During the last three fiscal years, however, currency fluctuations have not had a significant impact on the Company's cost of merchandise. The Company does not engage in hedging activities with respect to such exchange rate risk. Impact of Inflation The Company has historically been able to adjust prices, and, therefore, inflation has not had, nor is it expected to have, a significant effect on the operations of the Company. 15 18 Accounting Matters During 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130); and No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS No. 131). These pronouncements generally require additional disclosure and are not expected to have any effect on the Company's financial position or results of operations. The Company will adopt SFAS No. 130 and No. 131 during 1998. Year 2000 In 1997, the Company developed a plan to deal with the Year 2000 problem and began converting its computer systems to be Year 2000 compliant. The plan provides for the conversion efforts to be completed by the end of 1999. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The total cost of the project is estimated to be $100,000 and is being funded through operating cash flows. The Company will be expensing all costs associated with these systems changes as the costs are incurred. During 1998, the Company expects to initiate communications with suppliers and customers to determine the content to which the Company may be vulnerable to such parties' failure to remediate their own Year 2000 issue. Forward Looking Information Except for historical information contained herein, the statements in this Form are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include, among others, risks associated with the success of future advertising and marketing programs, the receipt and timing of future customer orders, price pressures and other competitive factors and a softening of retailer or consumer acceptance of the Company's products leading to a decrease in anticipated revenues and gross profit margins. Those and other risks are described in the Company's filings with the Securities and Exchange Commission (SEC), copies of which are available from the SEC or may be obtained upon request from the Company. 16 19 Item 8. Consolidated Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page ---- Independent Auditors' Report 18 Financial Statements: Consolidated Balance Sheets-- December 31, 1996 and 1997 19 Consolidated Statements of Operations -- Years ended December 31, 1995, 1996 and 1997 20 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1995, 1996 and 1997 21 Consolidated Statements of Cash Flows -- Years ended December 31, 1995, 1996 and 1997 22 Notes to Consolidated Financial Statements 24 17 20 Independent Auditors' Report The Board of Directors Marisa Christina, Incorporated: We have audited the accompanying consolidated financial statements of Marisa Christina, Incorporated and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedule listed under Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marisa Christina, Incorporated and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP New York, New York March 8, 1998 18 21 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1997
1996 1997 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 1,044,094 $ 1,007,153 Accounts receivable, less allowance for doubtful accounts of $73,344 in 1996 and $200,104 in 1997 9,080,251 9,174,602 Due from factor, net of allowances 5,967,379 -- Inventories 10,097,123 12,006,285 Income taxes recoverable -- 3,653,933 Prepaid expenses and other current assets 3,144,683 3,597,237 ------------ ------------ Total current assets 29,333,530 29,439,210 Property and equipment, net 2,672,823 3,186,404 Goodwill, less accumulated amortization of $2,784,616 in 1996 and $4,615,719 in 1997 32,940,650 31,294,348 Other assets 1,252,930 1,276,819 ------------ ------------ Total assets $ 66,199,933 $ 65,196,781 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Loans payable to banks $ 3,500,000 $ 6,500,000 Accounts payable 5,601,769 7,578,832 Income taxes payable 662,652 -- Accrued expenses and other current liabilities 1,942,725 3,419,528 ------------ ------------ Total current liabilities 11,707,146 17,498,360 Other liabilities 278,000 503,274 ------------ ------------ Total liabilities 11,985,146 18,001,634 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 15,000,000 shares authorized, 8,586,769 shares issued in 1996 and 1997 85,868 85,868 Additional paid-in capital 31,653,186 31,653,186 Retained earnings 24,413,471 18,421,447 Cumulative translation adjustment 16,612 (57,924) Treasury stock, 202,000 and 402,000 common shares in 1996 and 1997, at cost (1,954,350) (2,907,430) ------------ ------------ Total stockholders' equity 54,214,787 47,195,147 Commitments (note 8) ------------ ------------ Total liabilities and stockholders' equity $ 66,199,933 $ 65,196,781 ============ ============
See accompanying notes to consolidated financial statements. 19 22 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1995, 1996 and 1997
1995 1996 1997 ------------- ------------- ------------- Net sales $ 86,762,617 $ 115,536,726 $ 91,400,058 Cost of good sold 52,068,782 75,584,880 71,235,897 ------------- ------------- ------------- Gross profit 34,693,835 39,951,846 20,164,161 Selling, general and administrative expenses 19,474,289 29,467,665 30,002,464 Restructuring costs -- -- 1,263,056 ------------- ------------- ------------- Operating earnings (loss) 15,219,546 10,484,181 (11,101,359) Other income, net 700,413 2,293,205 2,532,033 Interest (expense) income, net 713,971 (857,019) (410,226) ------------- ------------- ------------- Earnings (loss) before income tax expense (benefit) 16,633,930 11,920,367 (8,979,552) Income tax expense (benefit) 6,485,978 4,543,826 (2,987,528) ------------- ------------- ------------- Net earnings (loss) $ 10,147,952 $ 7,376,541 $ (5,992,024) ============= ============= ============= Basic earnings (loss) per share $ 1.20 $ .87 $ (.72) ============= ============= ============= Diluted earnings (loss) per share $ 1.20 $ .86 $ (.72) ============= ============= =============
See accompanying notes to consolidated financial statements. 20 23 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1995, 1996 and 1997
Common stock Additional ------------------- Paid-in Retained Translation Treasury Shares Amount Capital Earnings Adjustment Stock Total --------- ------- ----------- ----------- -------- ----------- ----------- Balance at December 31, 1994 8,434,000 84,340 29,081,731 6,888,978 16,612 -- 36,071,661 Net earnings for the year ended December 31, 1995 -- -- -- 10,147,952 -- -- 10,147,952 Proceeds from exercise of stock option 250 3 3,247 -- -- -- 3,250 --------- ------- ----------- ----------- -------- ----------- ----------- Balance at December 31, 1995 8,434,250 84,343 29,084,978 17,036,930 16,612 -- 46,222,863 Net earnings for the year ended December 31, 1996 -- -- -- 7,376,541 -- -- 7,376,541 Issuance of common stock in acquisition of Adrienne Vittadini, Inc. 147,679 1,477 2,498,523 -- -- -- 2,500,000 Proceeds from exercise of stock options 4,840 48 62,872 -- -- -- 62,920 Other -- -- 6,813 -- -- -- 6,813 Purchase of treasury stock, at cost -- -- -- -- -- (1,954,350) (1,954,350) --------- ------- ----------- ----------- -------- ----------- ----------- Balance at December 31, 1996 8,586,769 85,868 31,653,186 24,413,471 16,612 (1,954,350) 54,214,787 Net loss for the year ended December 31, 1997 -- -- -- (5,992,024) -- -- (5,992,024) Purchase of treasury stock, at cost -- -- -- -- -- (953,080) (953,080) Foreign currency translation -- -- -- -- (74,536) -- (74,536) --------- ------- ----------- ----------- -------- ----------- ----------- Balance at December 31, 1997 8,586,769 $85,868 $31,653,186 $18,421,447 $(57,924) $(2,907,430) $47,195,147 ========= ======= =========== =========== ======== =========== ===========
See accompanying notes to consolidated financial statements. 21 24 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1995, 1996 and 1997
1995 1996 1997 ------------ ------------ ------------ Cash flows from operating activities: Net earnings (loss) $10,147,952 $ 7,376,541 $ (5,992,024) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 828,608 2,633,015 2,613,355 Provision (benefit) for deferred income taxes 53,373 224,000 (389,581) Changes in asset and liabilties, net of effects from purchase Adrienne Vittadini, Inc. in 1996: Accounts receivable, net (3,255,634) 4,225,189 (131,619) Due from factor -- (5,967,379) 5,967,379 Inventories (307,244) 1,723,482 (1,909,162) Prepaid expenses and other current assets (293,160) (802,511) 162,301 Other non-current assets 24,352 (23,589) (23,889) Accounts payable 2,061,127 (6,889,297) 1,939,795 Income taxes 311,227 (94,449) (4,316,585) Accrued expenses and other current liabilities 658,998 (1,266) 1,476,803 ------------ ------------ ------------ Net cash provided by (used in) operating activities 10,229,599 2,403,736 (603,227) ------------ ------------ ------------ Cash flows from investing activities: Acquisitions of property and equipment (541,666) (680,912) (1,295,833) Acquisition of net assets of Adrienne Vittadini, Inc., net of cash acquired -- (18,575,994) -- Other -- -- (184,801) ------------ ------------ ------------ Net cash used in investing activities (541,666) (19,256,906) (1,480,634) ------------ ------------ ------------
(Continued) 22 25 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued)
1995 1996 1997 ------------ ------------ ------------ Cash flows from financing activities: Issuance of common stock and capital contributions $ 3,250 $ 69,920 $ -- Borrowings (repayments) under line of credit facilities, net -- (731,037) 3,000,000 Acquisition of treasury stock -- (1,954,350) (953,080) Other (10,737) 6,813 -- ------------ ------------ ------------ Net cash provided by (used in) financing activities (7,487) (2,608,654) 2,046,920 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 9,680,446 (19,468,824) (36,941) Cash and cash equivalents at beginning of year 10,832,472 20,512,918 1,044,094 ------------ ------------ ------------ Cash and cash equivalents at end of year $20,512,918 $ 1,044,094 $ 1,007,153 ============ ============ ============ Cash paid during the year for: Income taxes $ 6,121,378 $ 4,334,938 $ 1,718,638 ============ ============ ============ Interest $ 6,921 $ 927,658 $ 451,650 ============ ============ ============
See accompanying notes to consolidated financial statements. 23 26 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1995, 1996 and 1997 (1) Summary of Significant Accounting Policies, Practices and Other Matters (a) Description of Business Marisa Christina, Incorporated (the Company) designs, manufactures, sources and markets a broad line of high quality "better" clothing for women under the Marisa ChristinaTM and Adrienne VittadiniTM labels and for children under the FlapdoodlesTM label. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly owned. Significant intercompany accounts and transactions are eliminated in consolidation. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (d) Inventories Inventories are stated at the lower of cost, by the first-in, first-out method, or market. (e) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line and accelerated methods at rates based upon the estimated useful lives of the respective assets (which range from five years to seven years) or, where applicable, the term of the lease, if shorter. Additions to property and equipment, as well as major renewals and betterments, are capitalized. The costs of maintenance, repairs, minor renewals and betterments are charged to operations as incurred. When properties are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recorded in operations. 24 27 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Practices and Other Matters, Continued (f) Long-Lived Assets The recoverability of long-lived assets is assessed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (g) Goodwill Goodwill is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired entities. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (h) Foreign Currency Translation The functional currency for certain of the Company's foreign operations is the local currency. The translation of the foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average rates of exchange prevailing during the year. Adjustments resulting from such translation are included as a separate component of stockholders' equity. (i) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 25 28 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Practices and Other Matters, Continued (j) Earnings Per Share The Company adopted the provisions of Statement of Financial Accounting Standards No. 128 Earnings per Share, as of December 31, 1997, and accordingly, has restated all prior periods in accordance with the pronouncements. The impact on adoption was not material. Basic net earnings (loss) per common share is based on the weighted average number of common shares outstanding, which were 8,434,088, 8,493,749 and 8,368,621 for the years ended December 31, 1995, 1996 and 1997, respectively. Diluted earnings (loss) per common share is based on the weighted average number of common shares outstanding and dilutive securities outstanding, which were 8,460,764, 8,551,980 and 8,368,621 for the years ended December 31, 1995, 1996 and 1997, respectively. The difference between basic and diluted weighted average shares relates to the dilutive effect of stock options. (k) Accounting for Stock-Based Compensation The Company has elected to apply the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), with pro forma disclosure of net earnings (loss) and net earnings (loss) per share as if the fair value based method prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), had been applied. (l) Uses of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments, consisting of cash and cash equivalents, accounts receivable, due from factors, accounts payable and loans payable to banks, approximate their carrying values due to the short-term maturities of such instruments. 26 29 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Practices and Other Matters, Continued (n) New Accounting Pronouncements During 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130) and No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS No. 131). These pronouncements generally require additional disclosure and are not expected to have any effect on the Company's financial position or results of operations. The Company will adopt SFAS No. 130 and No. 131 during 1998. (2) Restructuring The Company implemented restructuring initiatives during 1997 that included: the consolidation of warehouse and administrative functions of the Adrienne Vittadini and Marisa Christina divisions the restructuring of the Company's management and sales functions and the integration of information systems and operations. These initiatives, which resulted in a non-recurring restructuring charge of approximately $1.3 million in 1997 are summarized as follows:
Write-off or Accrued at cash paid December 31, Expense in 1997 1997 ---------- ---------- ---------- Facility consolidation and write- off of idle assets $ 819,564 $ 609,064 $ 210,500 Severance and benefits 443,492 336,262 107,230 ---------- ---------- ---------- $1,263,056 $ 945,326 $ 317,730 ========== ========== ==========
Amounts accrued at December 31, 1997 are included in accrued expenses and other current liabilities and are expected to be paid in 1998. 27 30 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Acquisition of Adrienne Vittadini, Inc. On January 18, 1996, the Company acquired, through a newly formed subsidiary, Adrienne Vittadini Enterprises, Inc. ("AVE"), substantially all of the assets and assumed certain liabilities of Adrienne Vittadini, Inc. ("AVI") and acquired the trademarks of Vittadini, Ltd., which relate to the business and operations of AVI for cash in the aggregate of $18,830,000 and 147,679 shares of the Company's common stock valued at $2,500,000. Additional consideration may be paid to AVI by the Company based upon profitability achieved by AVE in 1998 and 2000, up to a maximum additional purchase price of $39 million. For the six-year period beginning January 1, 1996, the Company will pay AVI 10% of net royalty and commission income received by AVE plus 10% of net earnings before interest, income taxes and amortization of goodwill of AVE over $3,000,000 per year. Subsequently, upon retirement of the two majority shareholders of AVI from the Company, AVI will receive, in the aggregate, an amount equal to .825% of net sales of AVE and its trademark licensees for a period ending on the later of December 31, 2005 or five years after the death of the last such shareholder. The acquisition occurred on January 18, 1996, but was based on asset values at December 31, 1995. Accordingly, operating results related to the AVI assets acquired commenced on January 1, 1996 and are consolidated with those of the Company from that date forward. Results of operations of the Company for the year ended December 31, 1996 and 1997, which include the results for AVE for a full year, are not directly comparable to the Company's results of operations for the year ended December 31, 1995. The acquisition has been accounted for using the purchase method of accounting. Amounts payable to AVI based on net sales, royalty or commission income will be charged to earnings annually. Such amounts were $218,000 and $225,000 in 1996 and 1997, respectively. Contingent consideration payable, if any, based on 1998 and 2000 results of AVE will be considered as part of the purchase price and allocated to goodwill. The Company funded the cash portion of the initial purchase price with accumulated cash reserves. The aggregate initial purchase price for the assets of AVI was as follows: Cash paid to AVI $10,080,000 Cash used to retire supplier note payable 8,750,000 Fair value, based on quoted market price of 147,679 shares of the Company's common stock issued to AVI 2,500,000 Liabilities assumed 11,764,619 Transaction costs 771,000 ----------- Initial purchase price $33,865,619 ===========
28 31 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Acquisition of Adrienne Vittadini, Inc., Continued The initial purchase price was allocated to the assets acquired based on their estimated fair value as follows: Cash $ 1,025,006 Accounts receivable 1,250,361 Inventory 2,495,382 Prepaid expenses and other current assets 862,947 Property and equipment 649,016 Goodwill 26,695,995 Other assets 886,912 ----------- Initial purchase price $33,865,619 ===========
(4) Inventories Inventories at December 31, 1996 and 1997 consist of the following:
1996 1997 ----------- ----------- Piece goods $ 3,028,686 $ 2,959,703 Work-in-process 1,612,459 2,863,727 Finished goods 5,455,978 6,182,855 ----------- ----------- $10,097,123 $12,006,285 =========== ===========
Based on management's assumptions and estimates relating to future operations, the Company has provided for slow moving inventory at December 31, 1996 and 1997. In addition, at December 31, 1997, the Company provided $600,000 for losses on excess purchase commitments. Actual results could differ from those estimates. 29 32 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets at December 31, 1996 and 1997 consist of the following:
1996 1997 ---------- ---------- Prepaid expenses $ 814,225 $ 717,400 Other receivables (primarily royalties) 1,451,156 1,551,978 Deferred tax assets 198,000 812,855 Other 681,302 515,004 ---------- ---------- $3,144,683 $3,597,237 ========== ==========
(6) Property and Equipment Property and equipment at December 31, 1996 and 1997 consist of the following:
1996 1997 ---------- ---------- Machinery and equipment $1,792,744 $2,248,831 Furniture and fixtures 1,438,274 1,697,596 Leasehold improvements 1,478,318 1,727,376 Transportation equipoment 107,716 107,716 ---------- ---------- Total 4,817,052 5,781,519 Less accumulated depreciation and amortization 2,144,229 2,595,115 ---------- ---------- $2,672,823 $3,186,404 ========== ==========
(7) Credit Facilities The Company has line of credit facilities with two banks, aggregating $35,000,000, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. The credit facilities expire on June 30, 1998 when the Company expects the facilities to be renewed. Borrowings under the credit facilities are secured by the Company's accounts receivable and imported inventory and bear interest at the prime rate or LIBOR plus 1% at the Company's option. As of December 31, 1997, $6,500,000 of borrowings, bearing interest at an average rate of 7.0%, and of commercial letters of credit of approximately $3,353,000 were outstanding under the credit facilities. At December 31, 1997, available borrowings under the facilities were $25,147,000. 30 33 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) Credit Facilities, Continued In connection with the acquisition of the assets described in note 3, AVE assumed and retained a factoring arrangement whereby AVE assigned and sold substantially all of its trade accounts receivable to a factor, without recourse as to credit risk but with recourse for any claims by the customer for adjustments in the normal course of business. In September 1997, the Company terminated this arrangement. Interest expense was $390,018, $918,189 and $451,650 for the years ended December 31, 1995, 1996 and 1997, respectively. (8) Retirement Plan The Company sponsors a 401(k) profit sharing plan for the benefit of all nonunion employees. Profit sharing expense charged to operations for the years ended December 31, 1995, 1996 and 1997 was $114,913, $173,257 and $284,354, respectively. (9) Leases The Company is committed under various noncancelable operating leases for factory, showroom, warehouse, office, production, design and retail store space. The leases expire on various dates through 2006. Future minimum lease payments under noncancelable operating leases as of December 31, 1997 are as follows:
Year ---- 1998 $ 2,526,447 1999 2,325,930 2000 1,805,201 2001 1,417,778 2002 1,296,874 Thereafter 1,406,732 ----------- $10,778,962 ===========
Total rent expense charged to operations was $1,598,525, $3,672,415 and $3,413,866 for the years ended December 31, 1995, 1996 and 1997, respectively. 31 34 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities at December 31, 1996 and 1997 consist of the following:
1996 1997 ---------- ---------- Accrued compensation $ 662,872 $1,368,566 Restructuring costs -- 317,730 Other accrued expenses 1,279,853 1,733,232 ---------- ---------- $1,942,725 $3,419,528 ========== ==========
(11) Other Income, Net Other income, net for the years ended December 31, 1995, 1996 and 1997 includes primarily royalty, commission and licensing income of $252,096, $2,256,269 and $2,568,506, respectively, and copyright infringement income of $448,317, $36,936 and $36,473, respectively. (12) Income Taxes The components of income tax expense (benefit) for the years ended December 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997 ----------- ----------- ----------- Current: Federal $ 5,227,000 $ 3,484,124 $(2,804,577) State and local 1,205,605 835,702 206,630 ----------- ----------- ----------- 6,432,605 4,319,826 (2,597,947) ----------- ----------- ----------- Deferred: Federal 39,373 180,500 (321,450) State and local 14,000 43,500 (68,131) ----------- ----------- ----------- 53,373 224,000 (389,581) ----------- ----------- ----------- $ 6,485,978 $ 4,543,826 $(2,987,528) =========== =========== ===========
At December 31, 1997, the Company had state net operating loss carryforwards of approximately $14,500,000, which expire in various amounts through 2002. 32 35 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Income Taxes, Continued The tax effects of temporary differences between the financial reporting and income tax basis of assets and liabilities that are included in the net deferred tax assets (liabilities) at December 31, 1996 and 1997 are as follows:
1996 1997 ----------- ----------- Deferred tax assets: Uniform inventory capitalization $ 181,000 $ 252,069 Depreciation on property and equipment -- 95,268 Accrued expenses and other assets and liabilities 17,000 639,316 Net operating losses, principally state 120,000 862,349 ----------- ----------- 318,000 1,849,002 Valuation allowance -- (727,114) ----------- ----------- Net deferred tax assets 318,000 1,121,888 =========== =========== Deferred tax liabilities: Depreciaion on property and equipment (47,000) -- Amortization of goodwill (351,000) (812,307) ----------- ----------- (398,000) (812,307) ----------- ----------- Net deferred tax assets (liabilities) $ (80,000) $ 309,581 =========== ===========
In assessing the realizability of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the temporary differences are deductible and tax planning strategies that can be implemented by the Company, management has established a valuation allowance at December 31, 1997, of $727,114. Management believes that future taxable income of the Company will more likely than not be sufficient to recover the remaining net deferred tax assets. 33 36 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Income Taxes, Continued A reconciliation of the provision for income taxes and the amounts computed by applying the Federal income tax rate of 34% to earnings (loss) before income tax expense (benefit) is as follows for the years ended December 31, 1995, 1996 and 1997:
1995 % 1996 % 1997 % ----------- ---- ----------- ---- ----------- ---- Income tax on earnings (loss) before income tax expense (benefit) computed at statutory rate $ 5,655,336 34.0% $ 4,052,925 34.0% $(3,053,048) (34.0%) State and local income tax, net of Federal income tax benefit 804,939 4.8 580,273 4.9 (635,705) (7.1) Valuation alowance -- -- 727,114 8.1 Other 25,503 0.2 (89,372) (0.8) (25,889) (0.3) ----------- ---- ----------- ---- ----------- ---- $ 6,485,778 39.0% $ 4,543,826 38.1% $(2,987,528) (33.3%) =========== ==== =========== ==== =========== ====
(13) Stock Option Plan The Company sponsors an incentive stock ownership plan ("Plan") that provides for the grant of up to 650,000 options to purchase shares of the Company's common stock at fair market value on the dates of grant. Options generally vest over a five-year period and are exercisable over a ten-year period from the dates of grant. In addition, in connection with the acquisition of Flapdoodles in 1994 the Company granted the former minority shareholders of Flapdoodles an evergreen option to purchase 250,000 shares of common stock at $13.00 per share. At December 31, 1997, there were 192,780 additional shares available for grant under the Plan. The per share weighted-average fair values of stock options granted during 1996 and 1997 were $10.54 and $3.42, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 6.6%, expected volatility of 64% and an expected life of 7 years. No options were granted in 1995. 34 37 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Stock Option Plan, Continued The Company applies APB No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in these financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's 1996 and 1997 net earnings (loss) would have been reduced to the pro forma amounts indicated below:
1996 1997 ----------- ------------- Net earnings (loss) - as reported $ 7,376,541 $ (5,992,024) - pro forma $ 6,977,000 $ (6,403,000) Basic earnings (loss) per share - as reported $ .87 $ (.72) - pro forma $ .82 $ (.77) Diluted earnings (loss) per share - as reported $ .86 $ (.72) - pro forma $ .82 $ (.77)
Pro forma net earnings reflects only options granted in 1996 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. 35 38 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Stock Option Plan, Continued Changes in options outstanding, options exercisable and shares reserved for issuance pursuant to stock options are as follows:
Weighted average Number of per share price shares ---------------- --------- December 31, 1994 $13.00 376,950 Exercised $13.00 (250) Forfeited $13.00 (4,100) -------- December 31, 1995 $13.00 372,600 Granted $15.30 336,790 Exercised $13.00 (4,840) Forfeited $11.59 (4,900) -------- December 31, 1996 $14.12 699,650 Granted $ 5.00 66,350 Forfeited $13.07 (63,870) -------- December 31, 1997 $13.35 702,130 ======== Options exercisable: December 31, 1995 $13.00 276,060 December 31, 1996 $13.59 347,144 December 31, 1997 $13.83 412,638
At December 31, 1997, the number of outstanding options, exercise prices and weighted-average remaining contractual life of outstanding options were 65,600 options at $5 and 9.75 years; 55,700 options at $10 and 8.5 years; 95,830 options at $13.00 and 6.5 years; and 235,000 options at $17 and 8.0 years. (14) Business Risks and Credit Concentrations A significant amount of the MC and AVE product lines are produced in Hong Kong and The People's Republic of China. The Company's operations with respect to these product lines may be significantly affected by economic, political, governmental and labor conditions in Hong Kong and The People's Republic of China until alternative sources of production could be found. The Company's products are sold principally in the United States to apparel retailers operating in the department and specialty store segments. No single customer accounted for more than 10% of the Company's sales in 1995, 1996 or 1997 and no account receivable from any customer exceeded $1,200,000 at December 31, 1997. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently an adverse change in those factors could affect the Company's estimate of its bad debts. 36 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There has been no change in accountants and or disagreements on any matter of accounting principle or financial statement disclosure. 37 40 PART III Items 10, 11, 12 and 13 The information required by these Items, other than the information set forth in Part I under the Section entitled "Executive Officers of the Registrant," is hereby incorporated by reference from the Company's definitive proxy statement for the Company's Annual Meeting of Stockholders to be held on May 20, 1998, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. 38 41 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) The following are included in Item 8 of Part II: PAGE ---- Independent Auditors' Report............................................. 18 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 1996 and 1997.............. 19 Consolidated Statements of Operations -- Years ended December 31, 1995, 1996 and 1997.................................... 20 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1995, 1996 and 1997........................ 21 Consolidated Statements of Cash Flows -- Years ended December 31, 1995, 1996 and 1997.................................... 22 Notes to Consolidated Financial Statements............................ 24 (a)(2) The following is a list of all financial statement schedules for the years ended December 31, 1995, 1996 and 1997 filed as part of this Report: Schedule II -- Valuation and Qualifying Accounts....................... 40 Schedules other than those listed above have been omitted because they are not required or are not applicable, or the required information has been included in the Consolidated Financial Statements or the Notes thereto. (a)(3) See accompanying Index to Exhibits ............................... 41 (b) No reports on Form 8-K were filed during the fourth quarter of 1997 (c) See accompanying Index to Exhibits................................ 42 (d) None 39 42 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts
Balance at Charged to Beginning Costs and Balance at Description of Period Expenses Deductions(a) End of Period - ----------- ---------- ---------- ------------- ------------- Allowance for doubtful accounts: Trade Year ended December 31, 1995 $129,305 169,703 162,809 136,199 Year ended December 31, 1996 $136,199 309,774 372,629 73,344 Year ended December 31, 1997 $ 73,344 353,660 226,900 200,104
(a) Deductions represent write-offs of specifically identified accounts. 40 43 INDEX TO EXHIBITS The following is a list of all exhibits filed as part of this report. Sequentially Numbered Exhibit No. Document Page - ----------- -------- ---- 2.1++ Asset Purchase Agreement dated June 30, 1993, between MCFD Acquisition L.L.C. and Flapdoodles, Inc .................... * 2.2++ Agreement and Plan of Reorganization, dated June 22, 1994, among Marisa Christina, Incorporated (the "Company"), Marisa Christina Holding, Inc., Marisa Christina Outlet Holdings, Inc., C.M. Marisa Christina (H.K.) Limited, MF Showroom Holdings, Inc., Flapdoodles, L.L.C. and the Investors in such companies named on the signature pages thereto .................................................... *** 2.3++ Asset Purchase Agreement, dated as of January 1, 1996, by and among Adrienne Vittadini, Inc. ("AVI"), the Company, and Adrienne Vittadini Enterprises, Inc. ("AVE") ........... ** 3.1 Amended and Restated Certificate of Incorporation of the Company .................................................... *** 3.2 By-Laws of the Company ..................................... *** 4.1 Option Agreement between the Company and Marc Ham, dated June 30, 1994 .............................................. *** 4.2 Option Agreement between the Company and Carole Bieber, dated June 30, 1994 ........................................ *** 4.3 1994 Stock Option Plan ..................................... *** 4.4 Registration Rights Agreement, dated as of January 1, 1996, by and among the Company, AVI, and the other parties listed on the signature pages thereto ...................... ** 10.1+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Michael H. Lerner ... *** 10.2+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Marc Ham ............ *** 10.3+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and G. Michael Dees ..... *** 10.4+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Carole Bieber ....... *** 10.5+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Christine M. Carlucci ................................................... *** 10.6+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and S.E. Melvin Hecht ... *** 10.7+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Elliot R. Epstein ... *** 10.8+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Robert Davidoff ..... *** 10.9+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Lawrence D. Glaubinger ................................................. *** 10.10+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and David W. Zalaznick .. *** 41 44 Sequentially Numbered Exhibit No. Document Page - ----------- -------- ---- 10.11+ Employment Agreement between the Company and Michael H. Lerner, dated January 1, 1998 .............................. (1) 10.12+ Amended and Restated Employment Agreement between the Company and Marc Ham, dated January 1, 1998 ................ (1) 10.13+ Amended and Restated Employment Agreement between the Company and Carole Bieber, dated January 1, 1998 ........... (1) 10.13A Employment Agreement between the Company and G. Michael Dees, dated January 1, 1998 ................................ (1) 10.13B Employment Agreement between the Company and Zachary Solomon, dated February 18, 1998 ........................... (1) 10.14+ Amended and Restated Employment Agreement, dated June 30, 1993, between the Company and TJC Management Corporation ... * 10.15 Lease Agreement, dated July 1, 1993, by and among Marc Ham and Carole Bieber, as trustees, and MCFD Acquisitions L.L.C. together with Subordination, Non-Disturbance and Attornment Agreement dated July 1, 1993 between MCFD Acquisitions L.L.C. and Wilmington Trust Company ........... * 10.16 Trademark Assignment Agreement, dated as of January 1, 1996, by and among Vittadini Ltd., the Company and AVE ..... ** 10.17 Trademark Collateral Assignment, dated as of January 1,1 996, by and among AVI, the Company, and AVE ................ ** 10.18 Employment Agreement, dated as of January 1, 1996, among the Company, AVE, and Adrienne Vittadini ................... ** 10.19 Employment Agreement, dated as of January 1, 1996, among the Company, AVE, and Gianluigi Vittadini .................. ** 10.20 Credit agreement dated August 21, 1996 by and among the Company, Marisa Christina Apparel, Inc., Flapdoodles, Inc., Adrienne Vittadini Enterprises, Inc. and the Chase Manhattan Bank, N.A ........................................ **** 10.21 Credit agreement dated August 29, 1996 by and among the Company, Marisa Christina Apparel, Inc., Flapdoodles, Inc., Adrienne Vittadini Enterprises, Inc. and The Bank of New York ................................................... **** 21 Subsidiaries of the Registrant ............................. *** 23 Consent of Independent Auditors ............................ (1) 27 Financial Data Schedule .................................... N/A - -------- * Incorporated by reference to the exhibits filed with the Company's Form S-1 Registration Statement (File No. 33-78958). ** Incorporated by reference to the exhibits filed with the Company's Report on Form 8-K, filed on February 1, 1996. *** Incorporated by reference to the Exhibits filed with the company's Annual Report on Forms 10-K, filed on March 22, 1996. **** Incorporated by reference to the Exhibits filed with the Company's Report on Forms 10-Q, filed on November 12, 1996. + This exhibit is a management contract or compensatory plan or arrangement required to be identified in this Form 10-K pursuant to Item 14(a)3 of this report. ++ The schedules (or similar attachments) to these agreements have not been filed pursuant to Item 601(b)(2) of Regulation S-K. Such schedules or attachments will be filed supplementally upon the request of the Securities and Exchange Commission. (1) Filed herewith 42 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARISA CHRISTINA, INCORPORATED BY: /s/ Michael H. Lerner ----------------------------------------- Michael H. Lerner Chairman, Chief Executive Officer and President Dated: March 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ Michael H. Lerner Chairman, Chief Executive March 25, 1998 - --------------------------- Officer and President Michael H. Lerner /s/ S. E. Melvin Hecht Chief Financial Officer, March 25, 1998 - --------------------------- Treasurer and Director S. E. Melvin Hecht /s/ Marc Ham Vice Chairman March 25, 1998 - --------------------------- Marc Ham /s/ Gianluigi Vittadini Director March 25, 1998 - --------------------------- Gianluigi Vittadini /s/ G. Michael Dees Director March 25, 1998 - --------------------------- G. Michael Dees /s/ Christine M. Carlucci Director March 25, 1998 - --------------------------- Christine M. Carlucci /s/ Robert Davidoff Director March 25, 1998 - --------------------------- Robert Davidoff /s/ Lawrence D. Glaubinger Director March 25, 1998 - --------------------------- Lawrence D. Glaubinger /s/ Brett J. Meyer Director March 25, 1998 - --------------------------- Brett J. Meyer Dated: March 25, 1998 43 EX-10.11 2 EMPLOYMENT AGREEMENT: M.H. LERNER 1 EMPLOYMENT AGREEMENT This Agreement (this "Agreement"), dated as of January 1, 1998, is made by and between Marisa Christina, Incorporated, a Delaware corporation (the "Corporation") and Michael H. Lerner (the "Executive"). Recitals 1. The Executive is Chairman of the Board of Directors of the Corporation and of Marisa Christina Apparel, Inc., a Delaware corporation and a wholly-owned subsidiary of the Corporation (the "Subsidiary"), and is currently employed as the Chief Executive Officer and the President of the Corporation and the Subsidiary. 2. The Corporation desires to continue the services of the Executive as Chairman of the Board of Directors, Chief Executive Officer and President of the Corporation and the Subsidiary and the employment of the Executive with the Corporation and the Subsidiary and to enter into an agreement embodying the terms of those continued relationships. 3. The Executive is willing to continue to serve as Chairman of the Board of Directors of the Corporation and the Subsidiary and is willing to accept continued employment by each of the Corporation and the Subsidiary on the terms set forth herein. Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and other good and valuable consideration, the Corporation and the Executive hereby agree as follows. 1. Definitions. 1.1. "Adjusted Operating Earnings" means (a) the Corporation's net earnings, plus (b) any extraordinary or non-recurring items of expense (including, without limitation, any items of expense associated with the Corporation's Offering (as hereinafter defined) and related Reorganization (as hereinafter defined) and related transactions, charged against such earnings, plus (c) interest expense (including deferred financing costs) in respect of indebtedness and capitalized leases charged against such net earnings, other than such interest expense in respect of indebtedness under revolving credit or similar arrangements to finance inventories and receivables, plus (d) tax expense in respect of all taxes measured or levied on the basis of the Corporation's earnings or profits charged against such net earnings, all as determined by 2 reference to the Corporation's audited financial statements for such year, plus (e) bonus expense in respect of this Agreement, employment agreements of even date herewith between the Corporation and Marc Ham and Carole Bieber, respectively, and other bonuses paid or payable to senior executives of the Corporation and/or all subsidiaries, including Marisa Christina Apparel, Inc., Flapdoodles, Inc. and Adrienne Vittadini Enterprises, Inc. With regard to the Corporation's Adjusted Operating Earnings for 1994, such Earnings will be determined on a pro forma basis, as if the Corporation's reorganization and Offering (as those terms are defined in, and pursuant to, the Corporation's Agreement and Plan of Reorganization, dated June 22, 1994), and the application of the net proceeds from the Offering, were consummated on January 1, 1994. 1.2. "Affiliate" means any person or entity controlling, controlled by or under common control with the Corporation. 1.3. "Board" means the Board of Directors of the Corporation. 1.4. "Cause" means (a) the Executive is convicted of a felony, or (b) the Executive, in carrying out his duties and responsibilities under this Agreement, is guilty of gross neglect or gross misconduct resulting, in either case, in material economic harm to the Corporation and/or the Subsidiary. 1.5. "Commencement Date" has the meaning assigned to it in Section 3. 1.6. "Date of Termination" means (a) in the case of a termination for which a Notice of Termination is required, the date of actual receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (b) in all other cases, the actual date on which the Executive's employment terminates during the Term of Employment. 1.7. "Disability" means the Executive's inability to render, for a period of six consecutive months, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician mutually acceptable to the Executive and the Corporation. If the Executive and the Corporation cannot agree as to such an independent medical physician each shall appoint one medical physician and those two physicians shall appoint a third physician who shall make such determination. 1.8. "Good Reason" means and shall be deemed to exist if, without the prior express written consent of the Executive, (a) the Executive is assigned any duties or responsibilities inconsistent in any material respect with the scope of the duties or responsibilities associated with the Executive's titles or positions, as set forth and described in Section 4 of this Agreement; (b) the Executive suffers a reduction in the duties, responsibilities or effective authority associated with his titles and positions as set forth and described in Section 4 of this Agreement; (c) the Executive is not appointed to, or is removed from, the offices or positions -2- 3 provided for in Section 4 of this Agreement, other than under circumstances involving Cause; (d) the Corporation fails to substantially perform any material term or provision of this Agreement; (e) the Executive's compensation (including base compensation and/or method of calculation of bonus) provided for hereunder is decreased; (f) the Executive's office location is changed to a location more than 50 miles from its location on the date hereof in New York, New York; (g) the Corporation fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 11.2 of this Agreement; (h) the Corporation continually fails to reimburse the Executive for business expenses in accordance with Section 5.3 of this Agreement; (i) the Corporation purports to terminate the Executive's employment for Cause and such purported termination of employment is not effected in accordance with the requirements of this Agreement; (j) the Executive shall not be nominated or elected, or shall be removed, as a director and Chairman of the Board of Directors of each of the Corporation and the Subsidiary; (k) the Board or the shareholders of the Corporation or the Subsidiary, either or both, as may be required to authorize the same, shall approve (i) any liquidation of the Corporation, or the sale of substantially all of the assets of the Corporation taken as a whole, or (ii) any merger, consolidation and/or other business combination involving the Corporation or any combination of any such transactions (a "Transaction"), other than a Transaction (A) involving only the Corporation and the Subsidiary, or (B) immediately after which the shareholders of the Corporation who were shareholders immediately prior to the transaction continue to own beneficially, directly or indirectly, in substantially similar proportions to those in effect immediately prior to such transaction more than 50% of the then outstanding voting securities of the Corporation and the Subsidiary; (l) any Person or group (as such term is defined in Rule 13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of related Persons which is not an Affiliate of the Corporation or the Subsidiary as of the Commencement Date shall beneficially own, directly or indirectly, more than 50% of the then outstanding voting stock of the Corporation or the Subsidiary. For purposes of this Agreement, "Person(s)" means any individual, entity, or other person, as defined in Section 3(a)(9) of the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or (n) the Corporation shall engage in any Business Combination with an Interested Person, each as defined in Article Fifth of the Corporation's Restated Certificate of Incorporation. 1.9. "Retirement" means the termination of the Executive's employment with the Corporation for any reason at any time after (a) the Executive attains age 65 or (b) the Executive meets the requirements for early or regular retirement under the Corporation's retirement policy, assuming for this purpose that she were a participant in such plan. 1.10. "Term of Employment" has the meaning assigned to it in Section 3. 2. Employment. Subject to the terms and provisions set forth in this Agreement, the Corporation hereby employs the Executive during the Term of Employment as the Chief -3- 4 Executive Officer and President of the Corporation, agrees to cause the Executive to be a director of the Subsidiary during the Term of Employment and agrees to cause the Subsidiary at all times during the Term of Employment to employ the Executive as Chief Executive Officer and President of the Subsidiary, and the Executive hereby accepts such employment. 3. Effective Date and Term of Employment. (a) The term of employment under this Agreement shall commence as of January 1, 1998, (the "Commencement Date") and shall, unless extended as hereinafter provided, terminate on December 31, 2000 (the "Term of Employment"). (b) On the initial termination date of the Term of Employment, and each succeeding anniversary, the Term of Employment shall automatically be extended for an additional one year period unless, not later than six months prior to any such anniversary, either party to this Agreement shall have given written notice to the other that the Term of Employment shall not be extended or further extended beyond its then already automatically extended term, if any. 4. Positions, Responsibilities and Duties. 4.1. Positions. During the Term of Employment, the Executive shall be employed as, and the Corporation shall at all times cause the Executive to be, the Chief Executive Officer and President of the Corporation and the Subsidiary. In addition to such positions, the Corporation shall use its best efforts to ensure that the Executive is elected by the shareholders of the Corporation to serve as a director of the Corporation during the Term of Employment, and shall use its best efforts to ensure that Executive is the Chairman of the Board of Directors. In such positions, the Executive shall have the duties, responsibilities and authority normally associated with the office and position of chairman, director, chief executive officer and president of a corporation, but in no event shall the Executive's duties, responsibilities and/or effective authority with respect to the Corporation and/or the Subsidiary be less than the duties, responsibilities and effective authority the Executive possessed immediately prior to the date of this Agreement. No other employee of the Corporation or the Subsidiary shall have authority and responsibilities that are equal to or greater than those of the Executive. The Executive shall report solely and directly to the Board and all other officers and other employees of the Subsidiary shall report directly to the Executive or the Executive's designees. No provision of this Section 4.1, however, shall preclude the Board from soliciting information from any officer or employee of the Corporation. 4.2. Duties. During the Term of Employment, the Executive shall devote all or substantially all of Executive's business time and effort to perform the duties associated with his offices and positions as set forth in Section 4.1 and shall use his best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, that the Executive shall not be limited from serving as a director of other companies and shall not be required to perform any duties and responsibilities which would be -4- 5 likely to result in a non-compliance with or violation or breach of any applicable law or regulation. 5. Compensation and Other Benefits. 5.1. Base Salary. During the Term of Employment, the Executive shall receive a base salary ("Base Salary"), payable in equal monthly installments, of $500,000 per annum. After the initial termination date of the Term of Employment, such Base Salary shall be reviewed annually for increase (but not decrease) in the sole discretion of the Compensation Committee of the Board; provided, however, that such Base Salary shall in any event be increased as of January 1 of each calendar year after such third anniversary at a rate equal to the percentage increase in the consumer price index for the New York-Northern New Jersey- Long Island, NY-NJ-CT metropolitan local area as reported by the United States Department of Labor (the "CPI") for the immediately preceding calendar year. In conducting any such annual review, the Compensation Committee of the Board shall take into account any change in the Executive's responsibilities, increases in the compensation of other executives of the Corporation or the Subsidiary or of its competitors, the performance of the Executive and other pertinent factors. Such increased Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. 5.2. Bonuses. During the Term of Employment, the Executive shall be eligible to participate, as determined by the Compensation Committee of the Board, in all incentive compensation plans and programs maintained by the Corporation and/or the Subsidiary for the benefit of senior executives, including without limitation bonus and stock option or other stock-based compensation plans. In particular, and without limiting the foregoing, during the Term of Employment, the Executive will be paid bonuses ("Bonuses"), on April 30 next following a year that included a portion of the Term of Employment, equal to four percent (4%) of (a) the difference of the Corporation's Adjusted Operating Earnings for such year over $3.0 million, multiplied by (b) a fraction, the numerator of which is the number of days during such year which include the Term of Employment, and the denominator of which is the number of days (365 or 366) in such year, provided, that in calculating the bonus, if any, payable in respect of 1994, the fraction in clause (b) will be deemed to be 1, as if the Term of Employment covered the entire year of 1994. 5.3. Expense Reimbursement. During the Term of Employment, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing his duties and responsibilities hereunder in accordance with the policies and procedures of the Corporation as in effect and actually applied immediately prior to the Commencement Date, including without limitation an automobile allowance and/or reimbursement, which will cover, among other things, expenses for automobile garage parking, automobile insurance and other automobile expenses, or, if more favorable to the -5- 6 Executive, as in effect at any time thereafter with respect to the Executive or other executives of the Corporation or the Subsidiary. 5.4. Vacation and Fringe Benefits. (a) The Corporation shall maintain disability insurance for the benefit of the Executive, and shall maintain such insurance so long as the Executive remains a senior executive officer of the Corporation, provided that (i) the aggregate amount of such insurance coverage shall be reduced if and to the extent necessary to reduce the aggregate annual premium payable by the Corporation to $10,000. The Corporation may, at its election and for its benefit, insure the Executive against death and/or disability and the Executive agrees to cooperate with the Corporation in obtaining such policies and in maintaining the same in full force and effect throughout the Term of Employment. (b) During the Term of Employment, the Executive shall also be entitled to such paid vacation, fringe benefits and perquisites as provided to the Executive by the Corporation and/or the Subsidiary immediately prior to the Commencement Date or, if more favorable to the Executive, as provided by the Corporation or the Subsidiary at any time thereafter. 5.5. Office and Support Staff. Unless the Executive otherwise agrees in writing, during the Term of Employment the Executive shall be entitled to executive secretarial and other administrative assistance of a type and extent, and to an office or offices (with furnishings and other appointments) of a type and size, at least equal to that provided to the Executive immediately prior to the date of this Agreement. 6. Termination. 6.1. Termination Due to Death or Disability. The Corporation may terminate the Executive's employment hereunder due to Disability. In the event of the Executive's death or a termination of the Executive's employment by the Corporation due to Disability, the Executive, his estate or his legal representative, as the case may be, shall be entitled to receive: (a) Base Salary continuation at the rate in effect (as provided for by Section 5.1 of this Agreement) on the Date of Termination through the later to occur of (i) the first anniversary of such termination, or (ii) the end of the Term of Employment; (b) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. -6- 7 (c) any deferred compensation not yet paid to the Executive (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and (d) reimbursement for expenses incurred but not yet paid prior to such death or Disability; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. Anything in this Agreement to the contrary notwithstanding, the Executive's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Corporation to surviving families of employees of the Corporation under such plans, programs, practices and policies relating to family death benefits, if any, in accordance with the most favorable plans, programs, practices and policies of the Corporation in effect on the date of the Executive's death with respect to other key employees of the Corporation and their families. Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled after the Disability Date of Termination to receive disability and other benefits at least equal to the most favorable of those provided by the Corporation to disabled employees and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in effect at any time during the 90-day period immediately preceding the Disability Date of Termination with respect to other key employees of the Corporation and their families. 6.2. Termination by the Corporation for Cause. The Corporation may terminate the Executive's employment hereunder for Cause as provided in this Section 6.2. If the Corporation terminates the Executive's employment hereunder for Cause, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the Date of Termination; (b) any deferred compensation (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and (c) reimbursement for expenses incurred, but not yet paid prior to such termination of employment; and (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. -7- 8 In any case described in this Section 6.2, the Executive shall be given written notice authorized by a vote of at least a majority of the members of the Board that the Corporation intends to terminate the Executive's employment for Cause. Such written notice, given in accordance with Section 6.7 of this Agreement, shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Executive's employment for Cause. The Executive shall be given the opportunity within 30 calendar days of the receipt of such notice to meet with the Board to defend such act or acts, or failure to act, and, if such act or failure to act is correctable, the Executive shall be given 30 business days after such meeting to correct such act or failure to act. If such act or failure to act is not correctable or upon failure of the Executive, within such latter 30 day period, to correct such act or failure to act, the Executive's employment by the Corporation shall automatically be terminated under this Section 6.2 for Cause as of the date determined in Section 1.5 of this Agreement. Anything herein to the contrary notwithstanding, if, following a termination of the Executive's employment by the Corporation for Cause based upon the conviction of the Executive for a felony involving actual dishonesty as against the Corporation or the Subsidiary, such conviction is overturned on appeal, the Executive shall be entitled to the payments and benefits that the Executive would have received as a result of a termination of the Executive's employment by the Corporation without Cause. 6.3. Termination Without Cause or Termination For Good Reason. The Corporation shall be permitted to terminate the Executive's employment hereunder without Cause and the Executive shall be permitted to terminate his employment hereunder for Good Reason. For purposes of this Agreement, such a termination of employment by the Executive shall constitute a "Termination for Good Reason" only if effected in accordance with the notice provisions of Section 6.7(b). If the Corporation terminates the Executive's employment hereunder without Cause, other than due to death or Disability, or if the Executive effects a Termination for Good Reason, the Executive shall be entitled to receive: (a) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment (unless in the case of termination by the Corporation without Cause, in which case, such product will be determined by reference to the highest annual bonus paid or payable under this Agreement during the Term of Employment) and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (b) a lump sum payment in an amount equal to the present value of Base Salary owed through the later to occur of (i) the second anniversary of such termination, or (ii) the end of the Term of Employment; -8- 9 (c) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued vacation pay; (d) reimbursement for expenses incurred, but not paid prior to such termination of employment; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.4. Voluntary Termination. The Executive may effect a Voluntary Termination of his employment hereunder. A "Voluntary Termination" shall mean a termination of employment upon 180 days prior written notice to the Corporation by the Executive on his own initiative other than (a) a termination due to death or Disability, (b) a Termination for Good Reason, or (c) a termination due to Retirement. A Voluntary Termination shall not be, nor shall it be deemed to be, a breach of this Agreement and shall entitle the Executive to all of the rights and benefits which the Executive would be entitled in the event of a termination of his employment by the Corporation for Cause. 6.5. Termination Due to Retirement. The Executive may terminate his employment hereunder as a result of Retirement. If the Executive employment hereunder is terminated due to Retirement, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the date of Retirement; (b) any deferred compensation not yet paid to the Executive (including, without limitation, any interest on credits on such deferred amounts) and any accrued vacation pay; (c) reimbursement for expenses incurred but not yet paid prior to the date of Retirement; and (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.6. No Mitigation; No Offset. In the event of any termination of employment under this Section 6, the Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that the Executive may obtain. -9- 10 Any amounts due under this Section 6 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 6.7. Notice of Termination. Any termination of the Executive's employment by the Corporation for Cause, any Termination for Good Reason, and any termination of employment by the Executive in connection with a Voluntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 13.3 of this Agreement (the "Notice of Termination"). The Notice of Termination shall be given (a) in the case of a termination for Cause, within 90 business days after a director of the Corporation (excluding the Executive) has actual knowledge of the events giving rise to such purported termination, (b) in the case of a Termination for Good Reason, within 180 days of the Executive's having actual knowledge of the event or events constituting Good Reason; and (c) in the case of Voluntary Termination, not later than 150 days prior to the date of termination specified in such notice. Such notice shall (x) indicate the specific termination provision in this Agreement relied upon, (y) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, as applicable, and (z) if the termination date is other than the date of receipt of such notice, specify the date on which the Executive's employment is to be terminated (which date shall not be earlier than the date on which such notice is actually given). 6.8. Certain Further Payments by the Corporation. 6.8.1. Tax Reimbursement Payment. Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to the Executive by the Corporation, the Subsidiary or any other Affiliate (collectively, the "Covered Payments"), is or becomes, at any time, as a result of (a) any Internal Revenue Service claims or assertions, or (b) Section 6.8.2 below or otherwise, subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, are hereinafter collectively, referred to as the "Excise Tax"), the Corporation shall pay to the Executive at the time specified in Section 6.9 below an additional amount (the "Tax Reimbursement Payment") such that after payment by the Executive of all taxes (including, without limitation, any interest or penalties imposed with respect to such taxes), including, without limitation, any Excise Tax, imposed on or attributable to the Tax Reimbursement Payment provided by this Agreement, the Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (a) the amount of the Excise Tax imposed upon the Covered Payments, and (b) an amount equal to the product of (i) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income, and (ii) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. -10- 11 6.8.2. Determining Excise Tax. Except as otherwise provided in Section 6.8.1(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Corporation's independent certified public accountants (the "Accountants") or legal counsel reasonably acceptable to the Executive, deliver timely, upon the Executive's request, a written opinion, reasonably satisfactory to the Executive's legal counsel, to the Executive that the Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (i) do not constitute "parachute payments", (ii) represent reasonable compensation for services actually rendered (within the meaning of Section 28OG(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (iii) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (b) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountants in accordance with the principles of Section 28OG of the Code. 6.8.3. Applicable Tax Rates and Deductions. For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (a) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (b) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. 6.8.4. Subsequent Events. If, pursuant to a written opinion, reasonably satisfactory to the Executive, of the Accountants (or legal counsel reasonably acceptable to the Executive) delivered to the Executive, the Excise Tax is subsequently determined on a reasonable basis and in good faith (other than as a result of a tax contest) to be less than the amount taken into account hereunder in calculating any Tax Reimbursement Payment made, the Executive shall repay to the Corporation the portion of any prior Tax Reimbursement Payment that would not have been paid if such redetermined Excise Tax had been applied in calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the mid-term discount rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the immediately -11- 12 foregoing sentence, if any portion of the Tax Reimbursement Payment to be refunded to the Corporation has been paid to any federal, state or local tax authority, repayment thereof shall not be required until an actual refund or credit of such portion has been made to or obtained by the Executive from such tax authority, and any interest payable to the Corporation shall not exceed the interest received or credited to the Executive by any such tax authority. The Executive shall be fully indemnified by the Corporation for any out-of-pocket costs, expenses or fees attributable to the filing of any refund or other claim. The Executive and the Corporation shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if any good faith claim for refund or credit from such tax authority made by the Executive is denied. Notwithstanding the immediately preceding paragraph, if, in the written opinion of the Executive's tax advisors delivered to the Accountants and the Corporation, the Excise Tax is later determined to exceed the amount taken into account by the Accountants or legal counsel, as the case may be, hereunder at the time any Tax Reimbursement Payment is made by reason of (i) manifest error, (ii) any payment the existence or amount of which could not be or was not determined or known about at the time of any Tax Reimbursement Payment, or (iii) any determination, claim or assertion made by any tax authority that the Excise Tax is or should be greater than the amount of such Excise Tax taken into account previously by the Accountants or legal counsel, as the case may be, or as otherwise previously determined, the Corporation shall make an additional Tax Reimbursement Payment in respect of such excess Excise Tax (which Tax Reimbursement Payment shall include, without limitation, any interest or penalties payable with respect to such excess Excise Tax) at the time specified in Section 6.9 below. With respect to this Section 6.8.4, if any such tax authority makes such a determination, the Executive shall notify the Corporation of such occurrence. If the Corporation obtains (at the Corporation's sole expense) an opinion of legal counsel reasonably satisfactory to the Executive that it is more likely than not that the Executive would succeed in disputing such claim, assertion or determination of such tax authority, the Executive shall, at the sole expense of the Corporation, make a good faith effort to contest such claim, assertion or determination of such tax authority in all relevant administrative proceedings with such tax authority and in any related judicial proceeding (excluding any appeals thereof); provided, however, that if the Executive determines in good faith that the continued contest of any such claim, assertion or determination with such tax authority would have an adverse impact on his overall tax position (which good faith determination shall take into account the magnitude of the amounts involved), then, upon receipt of notice by the Corporation from the Executive to that effect, the Executive shall, without foregoing any right to receive any Tax Reimbursement Payment described in this Section 6.8, have no further obligation to pursue any such contest with any such tax authority. The Executive may, as a condition to pursuing or commencing any contest described in this Section 6.8.4 in any judicial proceedings (which proceedings shall be in a forum chosen at the sole discretion of the Executive), require the Corporation to advance any amount of tax required to be paid in order to pursue such contest. In conducting any contest described in this Section 6.8.4, the Executive shall use his best efforts to keep the Corporation -12- 13 advised and will permit the Corporation to prepare and suggest appropriate responses and actions that may be reasonably made or taken by the Executive. Notwithstanding the above, the decisions as to such response or actions shall be solely that of the Executive and the Executive shall have the sole right to control the proceeding. The Corporation shall bear all expenses of any proceeding relating to any contest described in this Section 6.8.4, whether incurred by the Corporation or the Executive, including, without limitation, all fees and disbursements of attorneys, accountants and expert witnesses and any additional interest or penalties applicable. Nothing contained in this Agreement shall under any circumstances give the Corporation any right to examine the tax returns or any other records of the Executive. 6.9. Payment. Except as otherwise provided in this Agreement, and except with respect to continued payment of Base Salary in accordance with any provisions of this Agreement, any payments to which the Executive shall be entitled under this Section 6 shall be made as promptly as possible following (a) the Date of Termination, (b) the payment of any Covered Payments, or (c) the delivery of the opinion of the Executive's tax advisors, in accordance with Section 6.8.4. If the amount of any payment due to the Executive cannot be finally determined with 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Corporation and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any bonus or incentive plan or program provided or maintained by the Corporation, the Subsidiary or any other Affiliate and for which the Executive may qualify or be selected, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Corporation, the Subsidiary or any Affiliate, including, without limitation, any change of control agreements or any stock option or restricted stock agreements. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the Corporation, the Subsidiary or any other Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plans or programs. 8. Full Settlement. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others. 9. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, each of the parties hereto shall pay its own attorney fees and expenses incurred in connection with such dispute. In addition, each party shall pay its own -13- 14 legal fees and expenses incurred in connection with the preparation and negotiation of this Agreement. 10. Confidential Information and Noncompetition. 10.1. Confidential Information. The Executive shall not, during the Term of Employment and thereafter, without the prior express written consent of the Corporation or the Subsidiary, disclose any confidential information, knowledge or data relating to the Corporation, the Subsidiary or any other Affiliate and their respective businesses, which (a) was obtained by the Executive in the course of the Executive's employment with the Corporation, and (b) which is not information, knowledge or data otherwise in the public domain (other than by reason of a breach of this provision by the Executive), unless required to do so by a court of law or equity or by any governmental agency or other authority. In no event shall an asserted violation of this Section 10.1 constitute a basis for delaying or withholding the payment of any amounts otherwise payable to the Executive under this Agreement. 10.2. Noncompetition. If the Executive terminates his employment hereunder pursuant to Section 6.4 of this Agreement, or if the Corporation terminates Executive's employment hereunder pursuant to Section 6.1 or 6.2, then the Corporation, by written notice given to the Executive within 30 days after the Executive delivers a Notice of Termination in connection with a Voluntary Termination, may require that this Section 10.2 apply, subject to the Corporation complying with its obligations under this Agreement. If the Corporation gives notice to the Executive as provided in the preceding sentence, then the Executive, without the express written consent of the Corporation, shall not, for the twelve month period following the Date of Termination, engage in any business, whether as an employee, consultant, partner, principal, agent, representative or stockholder (other than as a stockholder of less than a 5% equity interest) or in any other corporate or representative capacity, if it involves engaging in, or rendering services or advice pertaining to, any lines of business the Corporation or the Subsidiary was actively conducting on the Date of Termination. If the Corporation shall institute any action or proceeding to enforce the provisions of this Section 10.2, or shall file any claim in any proceeding to enforce such provisions, the Executive hereby waives the claim or defense that the Corporation has an adequate remedy at law and waives the requirement that -14- 15 the Corporation post a bond in securing equitable relief, and the Executive shall not contend in any such action or proceeding the claim or defense that an adequate remedy at law exists. 11. Successors. 11.1. The Executive. This Agreement is personal to the Executive and, without the prior express written consent of the Corporation, shall not be assignable by the Executive, except that the Executive's rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition; intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, beneficiaries and/or legal representatives. 11.2. The Corporation. This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors and assigns. The Corporation shall require any successor to all or substantially all of the business and/or assets of the Corporation or the Subsidiary, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform if no such succession had taken place. 12. Miscellaneous. 12.1. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. 12.2. Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12.3. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: 828 Fifth Avenue New York, New York 10021 If to the Corporation: Marisa Christina, Incorporated 8101 Tonnelle Avenue North Bergen, New Jersey -15- 16 copy to: Brett Meyer, Esq. Kreindler & Relkin P.C. 350 Park Avenue New York, NY 10118 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. 12.4. Withholding. The Corporation may withhold from any amounts payable under this Agreement such federal, state or local income taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12.5. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 12.6. Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 12.7. Beneficiaries/References. The Executive shall be entitled to select (and change) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Corporation written notice thereof. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to other beneficiary(ies), estate or his legal representative(s). 12.8. Entire Agreement. Upon the commencement of the Term of Employment, this Agreement will contain the entire agreement between the parties concerning the subject matter hereof and will supersede all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect to the subject matter hereof, including the Old Employment Agreement, which is hereby terminated, discharged and released, but excluding the Director Indemnification Agreement dated as of June 30, 1994, by and between the Corporation and the Executive. 12.9. Representation. The Corporation represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between the Corporation and any other person, firm or organization or any applicable laws or regulations. -16- 17 12.10. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Executive's employment hereunder to the extent necessary to the intended preservation of such rights and obligations. 13. Arbitration. (a) Any controversy arising out of or relating to this Agreement shall be settled by arbitration in New York pursuant to the rules of the American Arbitration Association, and judgment may be entered in any Court having jurisdiction. (b) The parties consent to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with arbitration, including the entry of judgment on any award; and consent that any process, notice, motion or other application to either of said courts, and any papers in connection with arbitration, may be served by registered or certified mail, return receipt requested, by personal service, or in such other manner as may be permissible under the rules of the applicable court or arbitration tribunal, provided a reasonable time for appearance is allowed. (c) The arbitrators shall have no power to alter or modify any express provision of this Agreement, or to render an award which has the effect of altering or modifying any express provision hereof, provided, however, that any application for reformation of this Agreement shall be made to the arbitrators and not to any Court, and the arbitrators shall be empowered to determine whether valid grounds for reformation exist. (d) Any arbitration proceeding must be instituted within one year after the claimed breach occurred, and a party's failure to institute arbitration proceedings within such period shall constitute an absolute bar to the institution of any proceedings by said party and a waiver of such claimed breach. Notwithstanding any law or rule to the contrary, the determination of whether said one-year period has expired shall be made by the Court and shall not be within the jurisdiction of the arbitrators. (e) The Executive or the Corporation, as the case may be, may be awarded all reasonable attorneys' fees and expenses incurred by the Executive or the Corporation, as the case may be, in connection with any arbitration or court proceeding arising out of this Agreement, in the arbitrators' discretion. (f) In the event that any dispute arising under this Agreement shall be submitted to arbitration pursuant to this Section 13, the Executive shall be entitled to receive all compensation, bonuses, benefits and perquisites contemplated by this Agreement during the pendency of any such proceedings unless the Corporation shall place the disputed amount into an interest-bearing escrow account with the Corporation's attorneys, the terms of which -17- 18 escrow shall provide that all escrowed funds shall be immediately distributed to the party or parties entitled thereto immediately upon a determination of the arbitrators which is final, confirmed, and not subject to appeal. -18- 19 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. EXECUTIVE ------------------------------- Michael Lerner MARISA CHRISTINA, INCORPORATED MARISA CHRISTINA APPAREL, INC. By ---------------------------- Its ---------------------------- -19- EX-10.12 3 A/R EMPLOYMENT AGREEMENT: M. HAM 1 EMPLOYMENT AGREEMENT This Agreement (this "Agreement"), dated as of January 1, 1998 is made by and between Marisa Christina, Incorporated, a Delaware corporation (the "Corporation") and Marc Ham (the "Executive"). Recitals 1. The Corporation desires to continue the services of the Executive as President of Flapdoodles, Inc., a Delaware corporation and a wholly owned subsidiary of the Corporation ("Subsidiary") and the Vice Chairman of Marisa Christina, Inc. ("Company"), and to enter into an agreement embodying the terms of those continued relationships. 2. The Executive is willing to serve as President of the Subsidiary and Vice Chairman of the Company and is willing to accept continued employment on the terms set forth herein. Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and other good and valuable consideration, the Corporation and the Executive hereby agree as follows. 1. Definitions. 1.1. "Affiliate" means any person or entity controlling, controlled by or under common control with the Corporation. 1.2. "Board" means the Board of Directors of the Corporation. 1.3. "Cause" means (a) the Executive is convicted of a felony, or (b) the Executive, in carrying out Executive's duties and responsibilities under this Agreement, is guilty of gross neglect or gross misconduct resulting, in either case, in material economic harm to the Corporation and/or the Subsidiary. 1.4. "Commencement Date" has the meaning assigned to it in Section 3. 1.5. "Date of Termination" means (a) in the case of a termination for which a Notice of Termination is required, the date of actual receipt of such Notice of Termination or, if later, 2 the date specified therein, as the case may be, and (b) in all other cases, the actual date on which the Executive's employment terminates during the Term of Employment. 1.6. "Disability" means the Executive's inability to render, for a period of six consecutive months, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician mutually acceptable to the Executive and the Corporation. If the Executive and the Corporation cannot agree as to such an independent medical physician each shall appoint one medical physician and those two physicians shall appoint a third physician who shall make such determination. 1.7. "Good Reason" means and shall be deemed to exist if, without the prior express written consent of the Executive, (a) the Executive is assigned any duties or responsibilities inconsistent in any material respect with the scope of the duties or responsibilities associated with the Executive's titles or positions, as set forth and described in Section 4 of this Agreement; (b) the Executive suffers a reduction in the duties, responsibilities or effective authority associated with Executive's titles and positions as set forth and described in Section 4 of this Agreement; (c) the Executive is not appointed to, or is removed from, the offices or positions provided for in Section 4 of this Agreement, other than under circumstances involving Cause; (d) the Corporation fails to substantially perform any material term or provision of this Agreement; (e) the Executive's compensation (including base compensation and/or method of calculation of bonus) provided for hereunder is decreased; (f) the Executive's office location is changed to a location other than Newark, Delaware; (g) the Corporation fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 11.2 of this Agreement; (h) the Corporation continually fails to reimburse the Executive for business expenses in accordance with Section 5.3 of this Agreement; (i) the Corporation purports to terminate the Executive's employment for Cause and such purported termination of employment is not effected in accordance with the requirements of this Agreement; (j) the Executive shall not be nominated or elected, or shall be removed, as a director of the Board of Directors of each of the Corporation and the Subsidiary; (k) the Board or the shareholders of the Corporation or the Subsidiary, either or both, as may be required to authorize the same, shall approve (i) any liquidation of the Corporation, or the sale of substantially all of the assets of the Corporation taken as a whole, or (ii) any merger, consolidation and/or other business combination involving the Corporation or any combination of any such transactions (a "Transaction"), other than a Transaction (A) involving only the Corporation and the Subsidiary, or (B) immediately after which the shareholders of the Corporation who were shareholders immediately prior to the transaction continue to own beneficially, directly or indirectly, in substantially similar proportions to those in effect immediately prior to such transaction more than 50% of the then outstanding voting securities of the Corporation and the Subsidiary; (l) any Person or group (as such term is defined in Rule 13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of related Persons which is not an Affiliate of the Corporation or the Subsidiary as of the Commencement Date shall beneficially own, directly or indirectly, more than 50% of the -2- 3 then outstanding voting stock of the Corporation or the Subsidiary. For purposes of this Agreement, "Person(s)" means any individual, entity, or other person, as defined in Section 3(a)(9) of the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or (n) the Corporation shall engage in any Business Combination with an Interested Person, each as defined in Article Fifth of the Corporation's Restated Certificate of Incorporation. 1.8. "Retirement" means the termination of the Executive's employment with the Corporation for any reason at any time after (a) the Executive attains age 65 or (b) the Executive meets the requirements for early or regular retirement under the Corporation's retirement policy, assuming for this purpose that the Executive was a participant in such plan. 1.9. "Term of Employment" has the meaning assigned to it in Section 3. 2. Employment. Subject to the terms and provisions set forth in this Agreement, the Corporation hereby agrees to cause the Executive to be a director and Vice Chairman of the Company during the Term of Employment and also agrees to cause the Subsidiary at all times during the Term of Employment to employ the Executive as President of the Subsidiary, and the Executive hereby accepts such employment. 3. Effective Date and Term of Employment. (a) The term of employment under this Agreement shall commence as of January 1, 1998, (the "Commencement Date") and shall, unless extended as hereinafter provided, terminate on December 31, 2000 (the "Term of Employment"). (b) On the initial termination date of the Term of Employment, and each succeeding anniversary, the Term of Employment shall automatically be extended for an additional one year period unless, not later than six months prior to any such anniversary, either party to this Agreement shall have given written notice to the other that the Term of Employment shall not be extended or further extended beyond its then already automatically extended term, if any. 4. Positions, Responsibilities and Duties. 4.1. Positions. During the Term of Employment, the Executive shall be employed as, and the Corporation shall at all times cause the Executive to be Vice Chairman of the Company and the President of the Subsidiary. In addition to such positions, the Corporation shall use its best efforts to ensure that the Executive is elected by the shareholders of the Corporation to serve as a director of the Corporation during the Term of Employment. In such positions, the Executive shall have the duties, responsibilities and authority normally associated with the office and position of director, Vice Chairman and President of a corporation, but in no event shall the Executive's duties, responsibilities and/or effective authority with respect to the Corporation and/or the Subsidiary be less than the duties, -3- 4 responsibilities and effective authority the Executive possessed immediately prior to the date of this Agreement. 4.2. Duties. During the Term of Employment, the Executive shall devote all or substantially all of Executive's business time and effort to perform the duties associated with Executive's offices and positions as set forth in Section 4.1 and shall use Executive's best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, that the Executive shall not be limited from serving as a director of other companies and shall not be required to perform any duties and responsibilities which would be likely to result in a non-compliance with or violation or breach of any applicable law or regulation. 5. Compensation and Other Benefits. 5.1. Base Salary. During the Term of Employment, the Executive shall receive a base salary ("Base Salary"), payable in equal monthly installments, of $300,000 per annum. After the initial termination date of the Term of Employment, such Base Salary shall be reviewed annually for increase (but not decrease) beginning January 1, 1999 in the sole discretion of the Compensation Committee of the Board; provided, however, that such Base Salary shall in any event be increased as of January 1 of each calendar year after such third anniversary at a rate equal to the percentage increase in the consumer price index for the New York-Northern New Jersey-Long Island, NY-NJ-CT metropolitan local area as reported by the United States Department of Labor (the "CPI") for the immediately preceding calendar year. In conducting any such annual review, the Compensation Committee of the Board shall take into account any change in the Executive's responsibilities, increases in the compensation of other executives of the Corporation or the Subsidiary or of its competitors, the performance of the Executive and other pertinent factors. Such increased Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. 5.2. Bonuses. During the Term of Employment, the Executive shall be eligible to participate, as determined by the Compensation Committee of the Board, in all incentive compensation plans and programs maintained by the Corporation and/or the Subsidiary for the benefit of senior executives, including without limitation bonus and stock option or other stock-based compensation plans. By each April 30 next following a year that included a portion of the Term of Employment, the Compensation Committee will, in its discretion, consider paying bonuses to Executive based on the Executive's performance during that year and the Subsidiaries' results and financial performance during that year and such other considerations as they consider relevant. Such bonuses, if awarded, will be paid by such April 30. However, Executive acknowledges that such bonuses are discretionary, and have not been promised. -4- 5 5.3. Expense Reimbursement. During the Term of Employment, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing Executive's duties and responsibilities hereunder in accordance with the policies and procedures of the Corporation as in effect and actually applied immediately prior to the Commencement Date, including without limitation an automobile allowance and/or reimbursement, which will cover, among other things, expenses for automobile garage parking, automobile insurance and other automobile expenses, or, if more favorable to the Executive, as in effect at any time thereafter with respect to the Executive or other executives of the Corporation or the Subsidiary. 5.4. Vacation and Fringe Benefits. (a) The Corporation shall maintain disability insurance for the benefit of the Executive, and shall maintain such insurance so long as the Executive remains a senior executive officer of the Corporation, provided that (i) the aggregate amount of such insurance coverage shall be reduced if and to the extent necessary to reduce the aggregate annual premium payable by the Corporation to $10,000. The Corporation may, at its election and for its benefit, insure the Executive against death and/or disability and the Executive agrees to cooperate with the Corporation in obtaining such policies and in maintaining the same in full force and effect throughout the Term of Employment. (b) During the Term of Employment, the Executive shall also be entitled to such paid vacation, fringe benefits and perquisites as provided to the Executive by the Corporation and/or the Subsidiary immediately prior to the Commencement Date or, if more favorable to the Executive, as provided by the Corporation or the Subsidiary at any time thereafter. 5.5. Office and Support Staff. Unless the Executive otherwise agrees in writing, during the Term of Employment the Executive shall be entitled to executive secretarial and other administrative assistance of a type and extent, and to an office or offices (with furnishings and other appointments) of a type and size, at least equal to that provided to the Executive immediately prior to the date of this Agreement. 6. Termination. 6.1. Termination Due to Death or Disability. The Corporation may terminate the Executive's employment hereunder due to Disability. In the event of the Executive's death or a termination of the Executive's employment by the Corporation due to Disability, the Executive, Executive's estate or Executive's legal representative, as the case may be, shall be entitled to receive: (a) Base Salary continuation at the rate in effect (as provided for by Section 5.1 of this Agreement) on the Date of Termination through the later to occur of (i) the first anniversary of such termination, or (ii) the end of the Term of Employment; -5- 6 (b) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) any deferred compensation not yet paid to the Executive (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and (d) reimbursement for expenses incurred but not yet paid prior to such death or Disability; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. Anything in this Agreement to the contrary notwithstanding, the Executive's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Corporation to surviving families of employees of the Corporation under such plans, programs, practices and policies relating to family death benefits, if any, in accordance with the most favorable plans, programs, practices and policies of the Corporation in effect on the date of the Executive's death with respect to other key employees of the Corporation and their families. Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled after the Disability Date of Termination to receive disability and other benefits at least equal to the most favorable of those provided by the Corporation to disabled employees and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in effect at any time during the 90-day period immediately preceding the Disability Date of Termination with respect to other key employees of the Corporation and their families. 6.2. Termination by the Corporation for Cause. The Corporation may terminate the Executive's employment hereunder for Cause as provided in this Section 6.2. If the Corporation terminates the Executive's employment hereunder for Cause, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the Date of Termination; (b) any deferred compensation (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and -6- 7 (c) reimbursement for expenses incurred, but not yet paid prior to such termination of employment; and (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. In any case described in this Section 6.2, the Executive shall be given written notice authorized by a vote of at least a majority of the members of the Board that the Corporation intends to terminate the Executive's employment for Cause. Such written notice, given in accordance with Section 6.7 of this Agreement, shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Executive's employment for Cause. The Executive shall be given the opportunity within 30 calendar days of the receipt of such notice to meet with the Board to defend such act or acts, or failure to act, and, if such act or failure to act is correctable, the Executive shall be given 30 business days after such meeting to correct such act or failure to act. If such act or failure to act is not correctable or upon failure of the Executive, within such latter 30 day period, to correct such act or failure to act, the Executive's employment by the Corporation shall automatically be terminated under this Section 6.2 for Cause as of the date determined in Section 1.5 of this Agreement. Anything herein to the contrary notwithstanding, if, following a termination of the Executive's employment by the Corporation for Cause based upon the conviction of the Executive for a felony involving actual dishonesty as against the Corporation or the Subsidiary, such conviction is overturned on appeal, the Executive shall be entitled to the payments and benefits that the Executive would have received as a result of a termination of the Executive's employment by the Corporation without Cause. 6.3. Termination Without Cause or Termination For Good Reason. The Corporation shall be permitted to terminate the Executive's employment hereunder without Cause and the Executive shall be permitted to terminate Executive's employment hereunder for Good Reason. For purposes of this Agreement, such a termination of employment by the Executive shall constitute a "Termination for Good Reason" only if effected in accordance with the notice provisions of Section 6.7(b). If the Corporation terminates the Executive's employment hereunder without Cause, other than due to death or Disability, or if the Executive effects a Termination for Good Reason, the Executive shall be entitled to receive: (a) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment (unless in the case of termination by the Corporation without Cause, in which case, such product will be determined by reference to the highest annual bonus paid or payable under this Agreement during the Term of Employment)and a fraction, the numerator of which is -7- 8 the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (b) a lump sum payment in an amount equal to the present value of Base Salary owed through the later to occur of (i) the second anniversary of such termination, or (ii) the end of the Term of Employment; (c) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued vacation pay; (d) reimbursement for expenses incurred, but not paid prior to such termination of employment; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.4. Voluntary Termination. The Executive may effect a Voluntary Termination of Executive's employment hereunder. A "Voluntary Termination" shall mean a termination of employment upon 180 days prior written notice to the Corporation by the Executive on Executive's own initiative other than (a) a termination due to death or Disability, (b) a Termination for Good Reason, or (c) a termination due to Retirement. A Voluntary Termination shall not be, nor shall it be deemed to be, a breach of this Agreement and shall entitle the Executive to all of the rights and benefits which the Executive would be entitled in the event of a termination of Executive's employment by the Corporation for Cause. 6.5. Termination Due to Retirement. The Executive may terminate Executive's employment hereunder as a result of Retirement. If the Executive employment hereunder is terminated due to Retirement, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the date of Retirement; (b) any deferred compensation not yet paid to the Executive (including, without limitation, any interest on credits on such deferred amounts) and any accrued vacation pay; (c) reimbursement for expenses incurred but not yet paid prior to the date of Retirement; and -8- 9 (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.6. No Mitigation; No Offset. In the event of any termination of employment under this Section 6, the Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that the Executive may obtain. Any amounts due under this Section 6 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 6.7. Notice of Termination. Any termination of the Executive's employment by the Corporation for Cause, any Termination for Good Reason, and any termination of employment by the Executive in connection with a Voluntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 13.3 of this Agreement (the "Notice of Termination"). The Notice of Termination shall be given (a) in the case of a termination for Cause, within 90 business days after a director of the Corporation (excluding the Executive) has actual knowledge of the events giving rise to such purported termination, (b) in the case of a Termination for Good Reason, within 180 days of the Executive's having actual knowledge of the event or events constituting Good Reason; and (c) in the case of Voluntary Termination, not later than 150 days prior to the date of termination specified in such notice. Such notice shall (x) indicate the specific termination provision in this Agreement relied upon, (y) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, as applicable, and (z) if the termination date is other than the date of receipt of such notice, specify the date on which the Executive's employment is to be terminated (which date shall not be earlier than the date on which such notice is actually given). 6.8. Certain Further Payments by the Corporation. 6.8.1. Tax Reimbursement Payment. Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to the Executive by the Corporation, the Subsidiary or any other Affiliate (collectively, the "Covered Payments"), is or becomes, at any time, as a result of (a) any Internal Revenue Service claims or assertions, or (b) Section 6.8.2 below or otherwise, subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, are hereinafter collectively, referred to as the "Excise Tax"), the Corporation shall pay to the Executive at the time specified in Section 6.9 below an additional amount (the "Tax Reimbursement Payment") such that after payment by the Executive of all taxes (including, without limitation, any interest or penalties imposed with respect to such taxes), including, -9- 10 without limitation, any Excise Tax, imposed on or attributable to the Tax Reimbursement Payment provided by this Agreement, the Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (a) the amount of the Excise Tax imposed upon the Covered Payments, and (b) an amount equal to the product of (i) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income, and (ii) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. 6.8.2. Determining Excise Tax. Except as otherwise provided in Section 6.8.1(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Corporation's independent certified public accountants (the "Accountants") or legal counsel reasonably acceptable to the Executive, deliver timely, upon the Executive's request, a written opinion, reasonably satisfactory to the Executive's legal counsel, to the Executive that the Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (i) do not constitute "parachute payments", (ii) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (iii) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (b) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.8.3. Applicable Tax Rates and Deductions. For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (a) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (b) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. -10- 11 6.8.4. Subsequent Events. If, pursuant to a written opinion, reasonably satisfactory to the Executive, of the Accountants (or legal counsel reasonably acceptable to the Executive) delivered to the Executive, the Excise Tax is subsequently determined on a reasonable basis and in good faith (other than as a result of a tax contest) to be less than the amount taken into account hereunder in calculating any Tax Reimbursement Payment made, the Executive shall repay to the Corporation the portion of any prior Tax Reimbursement Payment that would not have been paid if such redetermined Excise Tax had been applied in calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the mid-term discount rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the immediately foregoing sentence, if any portion of the Tax Reimbursement Payment to be refunded to the Corporation has been paid to any federal, state or local tax authority, repayment thereof shall not be required until an actual refund or credit of such portion has been made to or obtained by the Executive from such tax authority, and any interest payable to the Corporation shall not exceed the interest received or credited to the Executive by any such tax authority. The Executive shall be fully indemnified by the Corporation for any out- of-pocket costs, expenses or fees attributable to the filing of any refund or other claim. The Executive and the Corporation shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if any good faith claim for refund or credit from such tax authority made by the Executive is denied. Notwithstanding the immediately preceding paragraph, if, in the written opinion of the Executive's tax advisors delivered to the Accountants and the Corporation, the Excise Tax is later determined to exceed the amount taken into account by the Accountants or legal counsel, as the case may be, hereunder at the time any Tax Reimbursement Payment is made by reason of (i) manifest error, (ii) any payment the existence or amount of which could not be or was not determined or known about at the time of any Tax Reimbursement Payment, or (iii) any determination, claim or assertion made by any tax authority that the Excise Tax is or should be greater than the amount of such Excise Tax taken into account previously by the Accountants or legal counsel, as the case may be, or as otherwise previously determined, the Corporation shall make an additional Tax Reimbursement Payment in respect of such excess Excise Tax (which Tax Reimbursement Payment shall include, without limitation, any interest or penalties payable with respect to such excess Excise Tax) at the time specified in Section 6.9 below. With respect to this Section 6.8.4, if any such tax authority makes such a determination, the Executive shall notify the Corporation of such occurrence. If the Corporation obtains (at the Corporation's sole expense) an opinion of legal counsel reasonably satisfactory to the Executive that it is more likely than not that the Executive would succeed in disputing such claim, assertion or determination of such tax authority, the Executive shall, at the sole expense of the Corporation, make a good faith effort to contest such claim, assertion or determination of such tax authority in all relevant administrative proceedings with such tax authority and in any related judicial proceeding (excluding any appeals thereof); provided, however, that if the Executive determines in good faith that the continued contest of any such claim, assertion or determination with such tax authority would have an adverse impact on Executive's overall tax -11- 12 position (which good faith determination shall take into account the magnitude of the amounts involved), then, upon receipt of notice by the Corporation from the Executive to that effect, the Executive shall, without foregoing any right to receive any Tax Reimbursement Payment described in this Section 6.8, have no further obligation to pursue any such contest with any such tax authority. The Executive may, as a condition to pursuing or commencing any contest described in this Section 6.8.4 in any judicial proceedings (which proceedings shall be in a forum chosen at the sole discretion of the Executive), require the Corporation to advance any amount of tax required to be paid in order to pursue such contest. In conducting any contest described in this Section 6.8.4, the Executive shall use Executive's best efforts to keep the Corporation advised and will permit the Corporation to prepare and suggest appropriate responses and actions that may be reasonably made or taken by the Executive. Notwithstanding the above, the decisions as to such response or actions shall be solely that of the Executive and the Executive shall have the sole right to control the proceeding. The Corporation shall bear all expenses of any proceeding relating to any contest described in this Section 6.8.4, whether incurred by the Corporation or the Executive, including, without limitation, all fees and disbursements of attorneys, accountants and expert witnesses and any additional interest or penalties applicable. Nothing contained in this Agreement shall under any circumstances give the Corporation any right to examine the tax returns or any other records of the Executive. 6.9. Payment. Except as otherwise provided in this Agreement, and except with respect to continued payment of Base Salary in accordance with any provisions of this Agreement, any payments to which the Executive shall be entitled under this Section 6 shall be made as promptly as possible following (a) the Date of Termination, (b) the payment of any Covered Payments, or (c) the delivery of the opinion of the Executive's tax advisors, in accordance with Section 6.8.4. If the amount of any payment due to the Executive cannot be finally determined with 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Corporation and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any bonus or incentive plan or program provided or maintained by the Corporation, the Subsidiary or any other Affiliate and for which the Executive may qualify or be selected, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Corporation, the Subsidiary or any Affiliate, including, without limitation, any change of control agreements or any stock option or restricted stock agreements. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the -12- 13 Corporation, the Subsidiary or any other Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plans or programs. 8. Full Settlement. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others. 9. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, each of the parties hereto shall pay its own attorney fees and expenses incurred in connection with such dispute. In addition, each party shall pay its own legal fees and expenses incurred in connection with the preparation and negotiation of this Agreement. 10. Confidential Information and Noncompetition. 10.1. Confidential Information. The Executive shall not, during the Term of Employment and thereafter, without the prior express written consent of the Corporation or the Subsidiary, disclose any confidential information, knowledge or data relating to the Corporation, the Subsidiary or any other Affiliate and their respective businesses, which (a) was obtained by the Executive in the course of the Executive's employment with the Corporation, and (b) which is not information, knowledge or data otherwise in the public domain (other than by reason of a breach of this provision by the Executive), unless required to do so by a court of law or equity or by any governmental agency or other authority. In no event shall an asserted violation of this Section 10.1 constitute a basis for delaying or withholding the payment of any amounts otherwise payable to the Executive under this Agreement. 10.2. Noncompetition. If the Executive terminates Executive's employment hereunder pursuant to Section 6.4 of this Agreement, or if the Corporation terminates Executive's employment hereunder pursuant to Section 6.1 or 6.2, then the Corporation, by written notice given to the Executive within 30 days after the Executive delivers a Notice of Termination in connection with a Voluntary Termination, may require that this Section 10.2 apply, subject to the Corporation complying with its obligations under this Agreement.. If the Corporation gives notice to the Executive as provided in the preceding sentence, then the Executive, without the express written consent of the Corporation, shall not, for the twelve month period following the Date of Termination, engage in any business, whether as an employee, consultant, partner, principal, agent, representative or stockholder (other than as a stockholder of less than a 5% equity interest) or in any other corporate or representative capacity, if it involves engaging in, or rendering services or advice pertaining to, any lines of business the Corporation or the Subsidiary was actively conducting on the Date of Termination. If the Corporation shall institute any action or proceeding to enforce the provisions of this Section -13- 14 10.2, or shall file any claim in any proceeding to enforce such provisions, the Executive hereby waives the claim or defense that the Corporation has an adequate remedy at law and waives the requirement that the Corporation post a bond in securing equitable relief, and the Executive shall not contend in any such action or proceeding the claim or defense that an adequate remedy at law exists. 11. Successors. 11.1. The Executive. This Agreement is personal to the Executive and, without the prior express written consent of the Corporation, shall not be assignable by the Executive, except that the Executive's rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition; intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, beneficiaries and/or legal representatives. 11.2. The Corporation. This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors and assigns. The Corporation shall require any successor to all or substantially all of the business and/or assets of the Corporation or the Subsidiary, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform if no such succession had taken place. 12. Miscellaneous. 12.1. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. 12.2. Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12.3. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Marc Ham Flapdoodles, Inc. 725 Dawson Avenue Newark, Delaware 19713 -14- 15 If to the Corporation: Marisa Christina, Incorporated 8101 Tonnelle Avenue North Bergen, New Jersey or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. 12.4. Withholding. The Corporation may withhold from any amounts payable under this Agreement such federal, state or local income taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12.5. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 12.6. Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 12.7. Beneficiaries/References. The Executive shall be entitled to select (and change) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Corporation written notice thereof. In the event of the Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to other beneficiary(ies), estate or Executive's legal representative(s). 12.8. Entire Agreement. Upon the commencement of the Term of Employment, this Agreement will contain the entire agreement between the parties concerning the subject matter hereof and will supersede all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect to the subject matter hereof, including the Old Employment Agreement, which is hereby terminated, discharged and released, but excluding (a) the Director Indemnification Agreement dated as of June 30, 1994, by and between the Corporation and the Executive, and (b) the non-competition agreement, dated July 1, 1993, between Subsidiary and Executive. 12.9. Representation. The Corporation represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between the Corporation and any other person, firm or organization or any applicable laws or regulations. -15- 16 12.10. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Executive's employment hereunder to the extent necessary to the intended preservation of such rights and obligations. 13. Arbitration. (a) Any controversy arising out of or relating to this Agreement shall be settled by arbitration in New York pursuant to the rules of the American Arbitration Association, and judgment may be entered in any Court having jurisdiction. (b) The parties consent to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with arbitration, including the entry of judgment on any award; and consent that any process, notice, motion or other application to either of said courts, and any papers in connection with arbitration, may be served by registered or certified mail, return receipt requested, by personal service, or in such other manner as may be permissible under the rules of the applicable court or arbitration tribunal, provided a reasonable time for appearance is allowed. (c) The arbitrators shall have no power to alter or modify any express provision of this Agreement, or to render an award which has the effect of altering or modifying any express provision hereof, provided, however, that any application for reformation of this Agreement shall be made to the arbitrators and not to any Court, and the arbitrators shall be empowered to determine whether valid grounds for reformation exist. (d) Any arbitration proceeding must be instituted within one year after the claimed breach occurred, and a party's failure to institute arbitration proceedings within such period shall constitute an absolute bar to the institution of any proceedings by said party and a waiver of such claimed breach. Notwithstanding any law or rule to the contrary, the determination of whether said one-year period has expired shall be made by the Court and shall not be within the jurisdiction of the arbitrators. (e) The Executive or the Corporation, as the case may be, may be awarded all reasonable attorneys' fees and expenses incurred by the Executive or the Corporation, as the case may be, in connection with any arbitration or court proceeding arising out of this Agreement, in the arbitrators' discretion. (f) In the event that any dispute arising under this Agreement shall be submitted to arbitration pursuant to this Section 13, the Executive shall be entitled to receive all compensation, bonuses, benefits and perquisites contemplated by this Agreement during the pendency of any such proceedings unless the Corporation shall place the disputed amount into an interest-bearing escrow account with the Corporation's attorneys, the terms of which -16- 17 escrow shall provide that all escrowed funds shall be immediately distributed to the party or parties entitled thereto immediately upon a determination of the arbitrators which is final, confirmed, and not subject to appeal. -17- 18 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. EXECUTIVE ------------------------------- Marc Ham MARISA CHRISTINA, INCORPORATED FLAPDOODLES, INC. By ---------------------------- Its ---------------------------- -18- EX-10.13 4 A/R EMPLOYMENT AGREEMENT: C. BIEBER 1 EMPLOYMENT AGREEMENT This Agreement (this "Agreement"), dated as of January 1, 1998 is made by and between Marisa Christina, Incorporated, a Delaware corporation (the "Corporation") and Carole Bieber (the "Executive"). Recitals 1. The Corporation desires to continue the services of the Executive as Vice President and Design Director of Flapdoodles, Inc., a Delaware corporation and a wholly owned subsidiary of the Corporation ("Subsidiary") and to enter into an agreement embodying the terms of those continued relationships. 2. The Executive is willing to serve as Vice President and Design Director of the Subsidiary and Vice Chairman of the Company and is willing to accept continued employment on the terms set forth herein. Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and other good and valuable consideration, the Corporation and the Executive hereby agree as follows. 1. Definitions. 1.1. "Affiliate" means any person or entity controlling, controlled by or under common control with the Corporation. 1.2. "Board" means the Board of Directors of the Corporation. 1.3. "Cause" means (a) the Executive is convicted of a felony, or (b) the Executive, in carrying out Executive's duties and responsibilities under this Agreement, is guilty of gross neglect or gross misconduct resulting, in either case, in material economic harm to the Corporation and/or the Subsidiary. 1.4. "Commencement Date" has the meaning assigned to it in Section 3. 1.5. "Date of Termination" means (a) in the case of a termination for which a Notice of Termination is required, the date of actual receipt of such Notice of Termination or, if later, 2 the date specified therein, as the case may be, and (b) in all other cases, the actual date on which the Executive's employment terminates during the Term of Employment. 1.6. "Disability" means the Executive's inability to render, for a period of six consecutive months, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician mutually acceptable to the Executive and the Corporation. If the Executive and the Corporation cannot agree as to such an independent medical physician each shall appoint one medical physician and those two physicians shall appoint a third physician who shall make such determination. 1.7. "Good Reason" means and shall be deemed to exist if, without the prior express written consent of the Executive, (a) the Executive is assigned any duties or responsibilities inconsistent in any material respect with the scope of the duties or responsibilities associated with the Executive's titles or positions, as set forth and described in Section 4 of this Agreement; (b) the Executive suffers a reduction in the duties, responsibilities or effective authority associated with Executive's titles and positions as set forth and described in Section 4 of this Agreement; (c) the Executive is not appointed to, or is removed from, the offices or positions provided for in Section 4 of this Agreement, other than under circumstances involving Cause; (d) the Corporation fails to substantially perform any material term or provision of this Agreement; (e) the Executive's compensation (including base compensation and/or method of calculation of bonus) provided for hereunder is decreased; (f) the Executive's office location is changed to a location other than Newark, Delaware; (g) the Corporation fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 11.2 of this Agreement; (h) the Corporation continually fails to reimburse the Executive for business expenses in accordance with Section 5.3 of this Agreement; (i) the Corporation purports to terminate the Executive's employment for Cause and such purported termination of employment is not effected in accordance with the requirements of this Agreement; (j) the Executive shall not be nominated or elected, or shall be removed, as a director of the Board of Directors of each of the Corporation and the Subsidiary; (k) the Board or the shareholders of the Corporation or the Subsidiary, either or both, as may be required to authorize the same, shall approve (i) any liquidation of the Corporation, or the sale of substantially all of the assets of the Corporation taken as a whole, or (ii) any merger, consolidation and/or other business combination involving the Corporation or any combination of any such transactions (a "Transaction"), other than a Transaction (A) involving only the Corporation and the Subsidiary, or (B) immediately after which the shareholders of the Corporation who were shareholders immediately prior to the transaction continue to own beneficially, directly or indirectly, in substantially similar proportions to those in effect immediately prior to such transaction more than 50% of the then outstanding voting securities of the Corporation and the Subsidiary; (l) any Person or group (as such term is defined in Rule 13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of related Persons which is not an Affiliate of the Corporation or the Subsidiary as of the Commencement Date shall beneficially own, directly or indirectly, more than 50% of the -2- 3 then outstanding voting stock of the Corporation or the Subsidiary. For purposes of this Agreement, "Person(s)" means any individual, entity, or other person, as defined in Section 3(a)(9) of the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or (n) the Corporation shall engage in any Business Combination with an Interested Person, each as defined in Article Fifth of the Corporation's Restated Certificate of Incorporation. 1.8. "Retirement" means the termination of the Executive's employment with the Corporation for any reason at any time after (a) the Executive attains age 65 or (b) the Executive meets the requirements for early or regular retirement under the Corporation's retirement policy, assuming for this purpose that the Executive was a participant in such plan. 1.9."Term of Employment" has the meaning assigned to it in Section 3. 2. Employment. Subject to the terms and provisions set forth in this Agreement, the Corporation hereby agrees to cause the Executive to be a director of the Subsidiary during the Term of Employment and agrees to cause the Subsidiary at all times during the Term of Employment to employ the Executive as Vice President and Design Director of the Subsidiary, and the Executive hereby accepts such employment. 3. Effective Date and Term of Employment. (a) The term of employment under this Agreement shall commence as of January 1, 1998, (the "Commencement Date") and shall, unless extended as hereinafter provided, terminate on December 31, 2000 (the "Term of Employment"). (b) On the initial termination date of the Term of Employment, and each succeeding anniversary, the Term of Employment shall automatically be extended for an additional one year period unless, not later than six months prior to any such anniversary, either party to this Agreement shall have given written notice to the other that the Term of Employment shall not be extended or further extended beyond its then already automatically extended term, if any. 4. Positions, Responsibilities and Duties. 4.1. Positions. During the Term of Employment, the Executive shall be employed as, and the Corporation shall at all times cause the Executive to be, the Vice President and Design Director of the Subsidiary. In such positions, the Executive shall have the duties, responsibilities and authority normally associated with the office and position of Vice President and Design Director of a corporation, but in no event shall the Executive's duties, responsibilities and/or effective authority with respect to the Corporation and/or the Subsidiary be less than the duties, responsibilities and effective authority the Executive possessed immediately prior to the date of this Agreement. -3- 4 4.2. Duties. During the Term of Employment, the Executive shall devote all or substantially all of Executive's business time and effort to perform the duties associated with Executive's offices and positions as set forth in Section 4.1 and shall use Executive's best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, that the Executive shall not be limited from serving as a director of other companies and shall not be required to perform any duties and responsibilities which would be likely to result in a non-compliance with or violation or breach of any applicable law or regulation. 5. Compensation and Other Benefits. 5.1. Base Salary. During the Term of Employment, the Executive shall receive a base salary ("Base Salary"), payable in equal monthly installments, of $300,000 per annum. After the initial termination date of the Term of Employment, such Base Salary shall be reviewed annually for increase (but not decrease) beginning January 1, 1999 in the sole discretion of the Compensation Committee of the Board; provided, however, that such Base Salary shall in any event be increased as of January 1 of each calendar year after such third anniversary at a rate equal to the percentage increase in the consumer price index for the New York-Northern New Jersey-Long Island, NY-NJ-CT metropolitan local area as reported by the United States Department of Labor (the "CPI") for the immediately preceding calendar year. In conducting any such annual review, the Compensation Committee of the Board shall take into account any change in the Executive's responsibilities, increases in the compensation of other executives of the Corporation or the Subsidiary or of its competitors, the performance of the Executive and other pertinent factors. Such increased Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. 5.2. Bonuses. During the Term of Employment, the Executive shall be eligible to participate, as determined by the Compensation Committee of the Board, in all incentive compensation plans and programs maintained by the Corporation and/or the Subsidiary for the benefit of senior executives, including without limitation bonus and stock option or other stock-based compensation plans. By each April 30 next following a year that included a portion of the Term of Employment, the Compensation Committee will, in its discretion, consider paying bonuses to Executive based on the Executive's performance during that year and the Subsidiaries' results and financial performance during that year and such other considerations as they consider relevant. Such bonuses, if awarded, will be paid by such April 30. However, Executive acknowledges that such bonuses are discretionary, and have not been promised. -4- 5 5.3. Expense Reimbursement. During the Term of Employment, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing Executive's duties and responsibilities hereunder in accordance with the policies and procedures of the Corporation as in effect and actually applied immediately prior to the Commencement Date, including without limitation an automobile allowance and/or reimbursement, which will cover, among other things, expenses for automobile garage parking, automobile insurance and other automobile expenses, or, if more favorable to the Executive, as in effect at any time thereafter with respect to the Executive or other executives of the Corporation or the Subsidiary. 5.4. Vacation and Fringe Benefits. (a) The Corporation shall maintain disability insurance for the benefit of the Executive, and shall maintain such insurance so long as the Executive remains a senior executive officer of the Corporation, provided that (i) the aggregate amount of such insurance coverage shall be reduced if and to the extent necessary to reduce the aggregate annual premium payable by the Corporation to $10,000. The Corporation may, at its election and for its benefit, insure the Executive against death and/or disability and the Executive agrees to cooperate with the Corporation in obtaining such policies and in maintaining the same in full force and effect throughout the Term of Employment. (b) During the Term of Employment, the Executive shall also be entitled to such paid vacation, fringe benefits and perquisites as provided to the Executive by the Corporation and/or the Subsidiary immediately prior to the Commencement Date or, if more favorable to the Executive, as provided by the Corporation or the Subsidiary at any time thereafter. 5.5. Office and Support Staff. Unless the Executive otherwise agrees in writing, during the Term of Employment the Executive shall be entitled to executive secretarial and other administrative assistance of a type and extent, and to an office or offices (with furnishings and other appointments) of a type and size, at least equal to that provided to the Executive immediately prior to the date of this Agreement. 6. Termination. 6.1. Termination Due to Death or Disability. The Corporation may terminate the Executive's employment hereunder due to Disability. In the event of the Executive's death or a termination of the Executive's employment by the Corporation due to Disability, the Executive, Executive's estate or Executive's legal representative, as the case may be, shall be entitled to receive: (a) Base Salary continuation at the rate in effect (as provided for by Section 5.1 of this Agreement) on the Date of Termination through the later to occur of (i) the first anniversary of such termination, or (ii) the end of the Term of Employment; -5- 6 (b) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) any deferred compensation not yet paid to the Executive (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and (d) reimbursement for expenses incurred but not yet paid prior to such death or Disability; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. Anything in this Agreement to the contrary notwithstanding, the Executive's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Corporation to surviving families of employees of the Corporation under such plans, programs, practices and policies relating to family death benefits, if any, in accordance with the most favorable plans, programs, practices and policies of the Corporation in effect on the date of the Executive's death with respect to other key employees of the Corporation and their families. Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled after the Disability Date of Termination to receive disability and other benefits at least equal to the most favorable of those provided by the Corporation to disabled employees and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in effect at any time during the 90-day period immediately preceding the Disability Date of Termination with respect to other key employees of the Corporation and their families. 6.2. Termination by the Corporation for Cause. The Corporation may terminate the Executive's employment hereunder for Cause as provided in this Section 6.2. If the Corporation terminates the Executive's employment hereunder for Cause, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the Date of Termination; (b) any deferred compensation (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and -6- 7 (c) reimbursement for expenses incurred, but not yet paid prior to such termination of employment; and (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. In any case described in this Section 6.2, the Executive shall be given written notice authorized by a vote of at least a majority of the members of the Board that the Corporation intends to terminate the Executive's employment for Cause. Such written notice, given in accordance with Section 6.7 of this Agreement, shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Executive's employment for Cause. The Executive shall be given the opportunity within 30 calendar days of the receipt of such notice to meet with the Board to defend such act or acts, or failure to act, and, if such act or failure to act is correctable, the Executive shall be given 30 business days after such meeting to correct such act or failure to act. If such act or failure to act is not correctable or upon failure of the Executive, within such latter 30 day period, to correct such act or failure to act, the Executive's employment by the Corporation shall automatically be terminated under this Section 6.2 for Cause as of the date determined in Section 1.5 of this Agreement. Anything herein to the contrary notwithstanding, if, following a termination of the Executive's employment by the Corporation for Cause based upon the conviction of the Executive for a felony involving actual dishonesty as against the Corporation or the Subsidiary, such conviction is overturned on appeal, the Executive shall be entitled to the payments and benefits that the Executive would have received as a result of a termination of the Executive's employment by the Corporation without Cause. 6.3. Termination Without Cause or Termination For Good Reason. The Corporation shall be permitted to terminate the Executive's employment hereunder without Cause and the Executive shall be permitted to terminate Executive's employment hereunder for Good Reason. For purposes of this Agreement, such a termination of employment by the Executive shall constitute a "Termination for Good Reason" only if effected in accordance with the notice provisions of Section 6.7(b). If the Corporation terminates the Executive's employment hereunder without Cause, other than due to death or Disability, or if the Executive effects a Termination for Good Reason, the Executive shall be entitled to receive: (a) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment (unless in the case of termination by the Corporation without Cause, in which case, such product will be determined by reference to the highest annual bonus paid or payable under this Agreement during the Term of Employment)and a fraction, the numerator of which is -7- 8 the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (b) a lump sum payment in an amount equal to the present value of Base Salary owed through the later to occur of (i) the second anniversary of such termination, or (ii) the end of the Term of Employment; (c) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued vacation pay; (d) reimbursement for expenses incurred, but not paid prior to such termination of employment; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.4. Voluntary Termination. The Executive may effect a Voluntary Termination of Executive's employment hereunder. A "Voluntary Termination" shall mean a termination of employment upon 180 days prior written notice to the Corporation by the Executive on Executive's own initiative other than (a) a termination due to death or Disability, (b) a Termination for Good Reason, or (c) a termination due to Retirement. A Voluntary Termination shall not be, nor shall it be deemed to be, a breach of this Agreement and shall entitle the Executive to all of the rights and benefits which the Executive would be entitled in the event of a termination of Executive's employment by the Corporation for Cause. 6.5. Termination Due to Retirement. The Executive may terminate Executive's employment hereunder as a result of Retirement. If the Executive employment hereunder is terminated due to Retirement, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the date of Retirement; (b) any deferred compensation not yet paid to the Executive (including, without limitation, any interest on credits on such deferred amounts) and any accrued vacation pay; (c) reimbursement for expenses incurred but not yet paid prior to the date of Retirement; and -8- 9 (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.6. No Mitigation; No Offset. In the event of any termination of employment under this Section 6, the Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that the Executive may obtain. Any amounts due under this Section 6 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 6.7. Notice of Termination. Any termination of the Executive's employment by the Corporation for Cause, any Termination for Good Reason, and any termination of employment by the Executive in connection with a Voluntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 13.3 of this Agreement (the "Notice of Termination"). The Notice of Termination shall be given (a) in the case of a termination for Cause, within 90 business days after a director of the Corporation (excluding the Executive) has actual knowledge of the events giving rise to such purported termination, (b) in the case of a Termination for Good Reason, within 180 days of the Executive's having actual knowledge of the event or events constituting Good Reason; and (c) in the case of Voluntary Termination, not later than 150 days prior to the date of termination specified in such notice. Such notice shall (x) indicate the specific termination provision in this Agreement relied upon, (y) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, as applicable, and (z) if the termination date is other than the date of receipt of such notice, specify the date on which the Executive's employment is to be terminated (which date shall not be earlier than the date on which such notice is actually given). 6.8. Certain Further Payments by the Corporation. 6.8.1. Tax Reimbursement Payment. Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to the Executive by the Corporation, the Subsidiary or any other Affiliate (collectively, the "Covered Payments"), is or becomes, at any time, as a result of (a) any Internal Revenue Service claims or assertions, or (b) Section 6.8.2 below or otherwise, subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, are hereinafter collectively, referred to as the "Excise Tax"), the Corporation shall pay to the Executive at the time specified in Section 6.9 below an additional amount (the "Tax Reimbursement Payment") such that after payment by the Executive of all taxes (including, without limitation, any interest or penalties imposed with respect to such taxes), including, -9- 10 without limitation, any Excise Tax, imposed on or attributable to the Tax Reimbursement Payment provided by this Agreement, the Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (a) the amount of the Excise Tax imposed upon the Covered Payments, and (b) an amount equal to the product of (i) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income, and (ii) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. 6.8.2. Determining Excise Tax. Except as otherwise provided in Section 6.8.1(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Corporation's independent certified public accountants (the "Accountants") or legal counsel reasonably acceptable to the Executive, deliver timely, upon the Executive's request, a written opinion, reasonably satisfactory to the Executive's legal counsel, to the Executive that the Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (i) do not constitute "parachute payments", (ii) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (iii) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (b) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.8.3. Applicable Tax Rates and Deductions. For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (a) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (b) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. -10- 11 6.8.4. Subsequent Events. If, pursuant to a written opinion, reasonably satisfactory to the Executive, of the Accountants (or legal counsel reasonably acceptable to the Executive) delivered to the Executive, the Excise Tax is subsequently determined on a reasonable basis and in good faith (other than as a result of a tax contest) to be less than the amount taken into account hereunder in calculating any Tax Reimbursement Payment made, the Executive shall repay to the Corporation the portion of any prior Tax Reimbursement Payment that would not have been paid if such redetermined Excise Tax had been applied in calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the mid-term discount rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the immediately foregoing sentence, if any portion of the Tax Reimbursement Payment to be refunded to the Corporation has been paid to any federal, state or local tax authority, repayment thereof shall not be required until an actual refund or credit of such portion has been made to or obtained by the Executive from such tax authority, and any interest payable to the Corporation shall not exceed the interest received or credited to the Executive by any such tax authority. The Executive shall be fully indemnified by the Corporation for any out-of-pocket costs, expenses or fees attributable to the filing of any refund or other claim. The Executive and the Corporation shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if any good faith claim for refund or credit from such tax authority made by the Executive is denied. Notwithstanding the immediately preceding paragraph, if, in the written opinion of the Executive's tax advisors delivered to the Accountants and the Corporation, the Excise Tax is later determined to exceed the amount taken into account by the Accountants or legal counsel, as the case may be, hereunder at the time any Tax Reimbursement Payment is made by reason of (i) manifest error, (ii) any payment the existence or amount of which could not be or was not determined or known about at the time of any Tax Reimbursement Payment, or (iii) any determination, claim or assertion made by any tax authority that the Excise Tax is or should be greater than the amount of such Excise Tax taken into account previously by the Accountants or legal counsel, as the case may be, or as otherwise previously determined, the Corporation shall make an additional Tax Reimbursement Payment in respect of such excess Excise Tax (which Tax Reimbursement Payment shall include, without limitation, any interest or penalties payable with respect to such excess Excise Tax) at the time specified in Section 6.9 below. With respect to this Section 6.8.4, if any such tax authority makes such a determination, the Executive shall notify the Corporation of such occurrence. If the Corporation obtains (at the Corporation's sole expense) an opinion of legal counsel reasonably satisfactory to the Executive that it is more likely than not that the Executive would succeed in disputing such claim, assertion or determination of such tax authority, the Executive shall, at the sole expense of the Corporation, make a good faith effort to contest such claim, assertion or determination of such tax authority in all relevant administrative proceedings with such tax authority and in any related judicial proceeding (excluding any appeals thereof); provided, however, that if the Executive determines in good faith that the continued contest of any such claim, assertion or determination with such tax authority would have an adverse impact on Executive's overall tax -11- 12 position (which good faith determination shall take into account the magnitude of the amounts involved), then, upon receipt of notice by the Corporation from the Executive to that effect, the Executive shall, without foregoing any right to receive any Tax Reimbursement Payment described in this Section 6.8, have no further obligation to pursue any such contest with any such tax authority. The Executive may, as a condition to pursuing or commencing any contest described in this Section 6.8.4 in any judicial proceedings (which proceedings shall be in a forum chosen at the sole discretion of the Executive), require the Corporation to advance any amount of tax required to be paid in order to pursue such contest. In conducting any contest described in this Section 6.8.4, the Executive shall use Executive's best efforts to keep the Corporation advised and will permit the Corporation to prepare and suggest appropriate responses and actions that may be reasonably made or taken by the Executive. Notwithstanding the above, the decisions as to such response or actions shall be solely that of the Executive and the Executive shall have the sole right to control the proceeding. The Corporation shall bear all expenses of any proceeding relating to any contest described in this Section 6.8.4, whether incurred by the Corporation or the Executive, including, without limitation, all fees and disbursements of attorneys, accountants and expert witnesses and any additional interest or penalties applicable. Nothing contained in this Agreement shall under any circumstances give the Corporation any right to examine the tax returns or any other records of the Executive. 6.9. Payment. Except as otherwise provided in this Agreement, and except with respect to continued payment of Base Salary in accordance with any provisions of this Agreement, any payments to which the Executive shall be entitled under this Section 6 shall be made as promptly as possible following (a) the Date of Termination, (b) the payment of any Covered Payments, or (c) the delivery of the opinion of the Executive's tax advisors, in accordance with Section 6.8.4. If the amount of any payment due to the Executive cannot be finally determined with 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Corporation and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any bonus or incentive plan or program provided or maintained by the Corporation, the Subsidiary or any other Affiliate and for which the Executive may qualify or be selected, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Corporation, the Subsidiary or any Affiliate, including, without limitation, any change of control agreements or any stock option or restricted stock agreements. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the -12- 13 Corporation, the Subsidiary or any other Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plans or programs. 8. Full Settlement. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others. 9. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, each of the parties hereto shall pay its own attorney fees and expenses incurred in connection with such dispute. In addition, each party shall pay its own legal fees and expenses incurred in connection with the preparation and negotiation of this Agreement. 10. Confidential Information and Noncompetition. 10.1. Confidential Information. The Executive shall not, during the Term of Employment and thereafter, without the prior express written consent of the Corporation or the Subsidiary, disclose any confidential information, knowledge or data relating to the Corporation, the Subsidiary or any other Affiliate and their respective businesses, which (a) was obtained by the Executive in the course of the Executive's employment with the Corporation, and (b) which is not information, knowledge or data otherwise in the public domain (other than by reason of a breach of this provision by the Executive), unless required to do so by a court of law or equity or by any governmental agency or other authority. In no event shall an asserted violation of this Section 10.1 constitute a basis for delaying or withholding the payment of any amounts otherwise payable to the Executive under this Agreement. 10.2. Noncompetition. If the Executive terminates Executive's employment hereunder pursuant to Section 6.4 of this Agreement, or if the Corporation terminates Executive's employment hereunder pursuant to Section 6.1 or 6.2, then the Corporation, by written notice given to the Executive within 30 days after the Executive delivers a Notice of Termination in connection with a Voluntary Termination, may require that this Section 10.2 apply, subject to the Corporation complying with its obligations under this Agreement.. If the Corporation gives notice to the Executive as provided in the preceding sentence, then the Executive, without the express written consent of the Corporation, shall not, for the twelve month period following the Date of Termination, engage in any business, whether as an employee, consultant, partner, principal, agent, representative or stockholder (other than as a stockholder of less than a 5% equity interest) or in any other corporate or representative capacity, if it involves engaging in, or rendering services or advice pertaining to, any lines of business the Corporation or the Subsidiary was actively conducting on the Date of Termination. If the Corporation shall institute any action or proceeding to enforce the provisions of this Section -13- 14 10.2, or shall file any claim in any proceeding to enforce such provisions, the Executive hereby waives the claim or defense that the Corporation has an adequate remedy at law and waives the requirement that the Corporation post a bond in securing equitable relief, and the Executive shall not contend in any such action or proceeding the claim or defense that an adequate remedy at law exists. 11. Successors. 11.1. The Executive. This Agreement is personal to the Executive and, without the prior express written consent of the Corporation, shall not be assignable by the Executive, except that the Executive's rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition; intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, beneficiaries and/or legal representatives. 11.2. The Corporation. This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors and assigns. The Corporation shall require any successor to all or substantially all of the business and/or assets of the Corporation or the Subsidiary, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform if no such succession had taken place. 12. Miscellaneous. 12.1. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. 12.2. Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12.3. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Carole Bieber Flapdoodles, Inc. 725 Dawson Avenue Newark, Delaware 19713 -14- 15 If to the Corporation: Marisa Christina, Incorporated 8101 Tonnelle Avenue North Bergen, New Jersey or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. 12.4. Withholding. The Corporation may withhold from any amounts payable under this Agreement such federal, state or local income taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12.5. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 12.6. Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 12.7. Beneficiaries/References. The Executive shall be entitled to select (and change) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Corporation written notice thereof. In the event of the Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to other beneficiary(ies), estate or Executive's legal representative(s). 12.8. Entire Agreement. Upon the commencement of the Term of Employment, this Agreement will contain the entire agreement between the parties concerning the subject matter hereof and will supersede all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect to the subject matter hereof, including the Old Employment Agreement, which is hereby terminated, discharged and released, but excluding (a) the Director Indemnification Agreement dated as of June 30, 1994, by and between the Corporation and the Executive, and (b) the non-competition agreement, dated July 1, 1993, between Subsidiary and Executive. 12.9. Representation. The Corporation represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between the Corporation and any other person, firm or organization or any applicable laws or regulations. -15- 16 12.10. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Executive's employment hereunder to the extent necessary to the intended preservation of such rights and obligations. 13. Arbitration. (a) Any controversy arising out of or relating to this Agreement shall be settled by arbitration in New York pursuant to the rules of the American Arbitration Association, and judgment may be entered in any Court having jurisdiction. (b) The parties consent to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with arbitration, including the entry of judgment on any award; and consent that any process, notice, motion or other application to either of said courts, and any papers in connection with arbitration, may be served by registered or certified mail, return receipt requested, by personal service, or in such other manner as may be permissible under the rules of the applicable court or arbitration tribunal, provided a reasonable time for appearance is allowed. (c) The arbitrators shall have no power to alter or modify any express provision of this Agreement, or to render an award which has the effect of altering or modifying any express provision hereof, provided, however, that any application for reformation of this Agreement shall be made to the arbitrators and not to any Court, and the arbitrators shall be empowered to determine whether valid grounds for reformation exist. (d) Any arbitration proceeding must be instituted within one year after the claimed breach occurred, and a party's failure to institute arbitration proceedings within such period shall constitute an absolute bar to the institution of any proceedings by said party and a waiver of such claimed breach. Notwithstanding any law or rule to the contrary, the determination of whether said one-year period has expired shall be made by the Court and shall not be within the jurisdiction of the arbitrators. (e) The Executive or the Corporation, as the case may be, may be awarded all reasonable attorneys' fees and expenses incurred by the Executive or the Corporation, as the case may be, in connection with any arbitration or court proceeding arising out of this Agreement, in the arbitrators' discretion. (f) In the event that any dispute arising under this Agreement shall be submitted to arbitration pursuant to this Section 13, the Executive shall be entitled to receive all compensation, bonuses, benefits and perquisites contemplated by this Agreement during the pendency of any such proceedings unless the Corporation shall place the disputed amount into an interest-bearing escrow account with the Corporation's attorneys, the terms of which -16- 17 escrow shall provide that all escrowed funds shall be immediately distributed to the party or parties entitled thereto immediately upon a determination of the arbitrators which is final, confirmed, and not subject to appeal. -17- 18 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. EXECUTIVE -------------------------- Carole Bieber MARISA CHRISTINA, INCORPORATED FLAPDOODLES, INC. By ---------------------- Its ---------------------- -18- EX-10.13.A 5 EMPLOYMENT AGREEMENT: G.M. DEES 1 EMPLOYMENT AGREEMENT This Agreement (this "Agreement"), dated as of January 1, 1998 is made by and between Marisa Christina, Incorporated, a Delaware corporation (the "Corporation") and G. Michael Dees (the "Executive"). Recitals 1. The Corporation desires to continue the services of the Executive as Executive Vice President of Marisa Christina Apparel, Inc., a Delaware corporation and a wholly owned subsidiary of the Corporation ("Subsidiary") and to enter into an agreement embodying the terms of those continued relationships. 2. The Executive is willing to continue to serve as Executive Vice President of the Subsidiary and is willing to accept continued employment by the Subsidiary on the terms set forth herein. Agreement NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and other good and valuable consideration, the Corporation and the Executive hereby agree as follows. 1. Definitions. 1.1. "Affiliate" means any person or entity controlling, controlled by or under common control with the Corporation. 1.2. "Board" means the Board of Directors of the Corporation. 1.3. "Cause" means (a) the Executive is convicted of a felony, or (b) the Executive, in carrying out Executive's duties and responsibilities under this Agreement, is guilty of gross neglect or gross misconduct resulting, in either case, in material economic harm to the Corporation and/or the Subsidiary. 1.4. "Commencement Date" has the meaning assigned to it in Section 3. 1.5. "Date of Termination" means (a) in the case of a termination for which a Notice of Termination is required, the date of actual receipt of such Notice of Termination or, if later, 2 the date specified therein, as the case may be, and (b) in all other cases, the actual date on which the Executive's employment terminates during the Term of Employment. 1.6. "Disability" means the Executive's inability to render, for a period of six consecutive months, services hereunder by reason of permanent disability, as determined by the written medical opinion of an independent medical physician mutually acceptable to the Executive and the Corporation. If the Executive and the Corporation cannot agree as to such an independent medical physician each shall appoint one medical physician and those two physicians shall appoint a third physician who shall make such determination. 1.7. "Good Reason" means and shall be deemed to exist if, without the prior express written consent of the Executive, (a) the Executive is assigned any duties or responsibilities inconsistent in any material respect with the scope of the duties or responsibilities associated with the Executive's titles or positions, as set forth and described in Section 4 of this Agreement; (b) the Executive suffers a reduction in the duties, responsibilities or effective authority associated with Executive's titles and positions as set forth and described in Section 4 of this Agreement; (c) the Executive is not appointed to, or is removed from, the offices or positions provided for in Section 4 of this Agreement, other than under circumstances involving Cause; (d) the Corporation fails to substantially perform any material term or provision of this Agreement; (e) the Executive's compensation (including base compensation and/or method of calculation of bonus) provided for hereunder is decreased; (f) the Executive's office location is changed to a location other than Newark, Delaware; (g) the Corporation fails to obtain the full assumption of this Agreement by a successor entity in accordance with Section 11.2 of this Agreement; (h) the Corporation continually fails to reimburse the Executive for business expenses in accordance with Section 5.3 of this Agreement; (i) the Corporation purports to terminate the Executive's employment for Cause and such purported termination of employment is not effected in accordance with the requirements of this Agreement; (j) the Executive shall not be nominated or elected, or shall be removed, as a director of the Board of Directors of each of the Corporation and the Subsidiary; (k) the Board or the shareholders of the Corporation or the Subsidiary, either or both, as may be required to authorize the same, shall approve (i) any liquidation of the Corporation, or the sale of substantially all of the assets of the Corporation taken as a whole, or (ii) any merger, consolidation and/or other business combination involving the Corporation or any combination of any such transactions (a "Transaction"), other than a Transaction (A) involving only the Corporation and the Subsidiary, or (B) immediately after which the shareholders of the Corporation who were shareholders immediately prior to the transaction continue to own beneficially, directly or indirectly, in substantially similar proportions to those in effect immediately prior to such transaction more than 50% of the then outstanding voting securities of the Corporation and the Subsidiary; (l) any Person or group (as such term is defined in Rule 13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of related Persons which is not an Affiliate of the Corporation or the Subsidiary as of the Commencement Date shall beneficially own, directly or indirectly, more than 50% of the -2- 3 then outstanding voting stock of the Corporation or the Subsidiary. For purposes of this Agreement, "Person(s)" means any individual, entity, or other person, as defined in Section 3(a)(9) of the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or (n) the Corporation shall engage in any Business Combination with an Interested Person, each as defined in Article Fifth of the Corporation's Restated Certificate of Incorporation. 1.8. "Retirement" means the termination of the Executive's employment with the Corporation for any reason at any time after (a) the Executive attains age 65 or (b) the Executive meets the requirements for early or regular retirement under the Corporation's retirement policy, assuming for this purpose that the Executive was a participant in such plan. 1.9. "Term of Employment" has the meaning assigned to it in Section 3. 2. Employment. Subject to the terms and provisions set forth in this Agreement, the Corporation hereby agrees to cause the Executive to be a director of the Subsidiary during the Term of Employment and also agrees to cause the Subsidiary at all times during the Term of Employment to employ the Executive as Executive Vice President of the Subsidiary, and the Executive hereby accepts such employment. 3. Effective Date and Term of Employment. (a) The term of employment under this Agreement shall commence as of January 1, 1998, (the "Commencement Date") and shall, unless extended as hereinafter provided, terminate on December 31, 2000 (the "Term of Employment"). (b) On the initial termination date of the Term of Employment, and each succeeding anniversary, the Term of Employment shall automatically be extended for an additional one year period unless, not later than six months prior to any such anniversary, either party to this Agreement shall have given written notice to the other that the Term of Employment shall not be extended or further extended beyond its then already automatically extended term, if any. 4. Positions, Responsibilities and Duties. 4.1. Positions. During the Term of Employment, the Executive shall be employed as, and the Corporation shall at all times cause the Executive to be, the Executive Vice President of the Subsidiary. In addition to such positions, the Corporation shall use its best efforts to ensure that the Executive is elected by the shareholders of the Corporation to serve as a director of the Corporation during the Term of Employment. In such position, the Executive shall have the duties, responsibilities and authority normally associated with the office and position of director and Executive Vice President of a corporation, but in no event shall the Executive's duties, responsibilities and/or effective authority with respect to the Corporation and/or the Subsidiary be less than the duties, responsibilities and effective authority the Executive possessed immediately prior to the date of this Agreement. -3- 4 4.2. Duties. During the Term of Employment, the Executive shall devote all or substantially all of Executive's business time and effort to perform the duties associated with Executive's offices and positions as set forth in Section 4.1 and shall use Executive's best efforts to perform faithfully and efficiently the duties and responsibilities contemplated by this Agreement; provided, however, that the Executive shall not be limited from serving as a director of other companies and shall not be required to perform any duties and responsibilities which would be likely to result in a non-compliance with or violation or breach of any applicable law or regulation. 5. Compensation and Other Benefits. 5.1. Base Salary. During the Term of Employment, the Executive shall receive a base salary ("Base Salary"), payable in equal monthly installments, of $250,000 per annum. After the initial termination date of the Term of Employment, such Base Salary shall be reviewed annually for increase (but not decrease) beginning January 1, 1999 in the sole discretion of the Compensation Committee of the Board; provided, however, that such Base Salary shall in any event be increased as of January 1 of each calendar year after such third anniversary at a rate equal to the percentage increase in the consumer price index for the New York-Northern New Jersey-Long Island, NY-NJ-CT metropolitan local area as reported by the United States Department of Labor (the "CPI") for the immediately preceding calendar year. In conducting any such annual review, the Compensation Committee of the Board shall take into account any change in the Executive's responsibilities, increases in the compensation of other executives of the Corporation or the Subsidiary or of its competitors, the performance of the Executive and other pertinent factors. Such increased Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. 5.2. Bonuses. During the Term of Employment, the Executive shall be eligible to participate, as determined by the Compensation Committee of the Board, in all incentive compensation plans and programs maintained by the Corporation and/or the Subsidiary for the benefit of senior executives, including without limitation bonus and stock option or other stock-based compensation plans. By each April 30 next following a year that included a portion of the Term of Employment, the Compensation Committee will, in its discretion, consider paying bonuses to Executive based on the Executive's performance during that year and the Subsidiaries' results and financial performance during that year and such other considerations as they consider relevant. Such bonuses, if awarded, will be paid by such April 30. However, Executive acknowledges that such bonuses are discretionary, and have not been promised. -4- 5 5.3. Expense Reimbursement. During the Term of Employment, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing Executive's duties and responsibilities hereunder in accordance with the policies and procedures of the Corporation as in effect and actually applied immediately prior to the Commencement Date, including without limitation an automobile allowance and/or reimbursement, which will cover, among other things, expenses for automobile garage parking, automobile insurance and other automobile expenses, or, if more favorable to the Executive, as in effect at any time thereafter with respect to the Executive or other executives of the Corporation or the Subsidiary. 5.4. Vacation and Fringe Benefits. (a) The Corporation shall maintain disability insurance for the benefit of the Executive, and shall maintain such insurance so long as the Executive remains a senior executive officer of the Corporation, provided that (i) the aggregate amount of such insurance coverage shall be reduced if and to the extent necessary to reduce the aggregate annual premium payable by the Corporation to $10,000. The Corporation may, at its election and for its benefit, insure the Executive against death and/or disability and the Executive agrees to cooperate with the Corporation in obtaining such policies and in maintaining the same in full force and effect throughout the Term of Employment. (b) During the Term of Employment, the Executive shall also be entitled to such paid vacation, fringe benefits and perquisites as provided to the Executive by the Corporation and/or the Subsidiary immediately prior to the Commencement Date or, if more favorable to the Executive, as provided by the Corporation or the Subsidiary at any time thereafter. 5.5. Office and Support Staff. Unless the Executive otherwise agrees in writing, during the Term of Employment the Executive shall be entitled to executive secretarial and other administrative assistance of a type and extent, and to an office or offices (with furnishings and other appointments) of a type and size, at least equal to that provided to the Executive immediately prior to the date of this Agreement. 6. Termination. 6.1. Termination Due to Death or Disability. The Corporation may terminate the Executive's employment hereunder due to Disability. In the event of the Executive's death or a termination of the Executive's employment by the Corporation due to Disability, the Executive, Executive's estate or Executive's legal representative, as the case may be, shall be entitled to receive: (a) Base Salary continuation at the rate in effect (as provided for by Section 5.1 of this Agreement) on the Date of Termination through the later to occur of (i) the first anniversary of such termination, or (ii) the end of the Term of Employment; -5- 6 (b) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (c) any deferred compensation not yet paid to the Executive (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and (d) reimbursement for expenses incurred but not yet paid prior to such death or Disability; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. Anything in this Agreement to the contrary notwithstanding, the Executive's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Corporation to surviving families of employees of the Corporation under such plans, programs, practices and policies relating to family death benefits, if any, in accordance with the most favorable plans, programs, practices and policies of the Corporation in effect on the date of the Executive's death with respect to other key employees of the Corporation and their families. Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled after the Disability Date of Termination to receive disability and other benefits at least equal to the most favorable of those provided by the Corporation to disabled employees and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in effect at any time during the 90-day period immediately preceding the Disability Date of Termination with respect to other key employees of the Corporation and their families. 6.2. Termination by the Corporation for Cause. The Corporation may terminate the Executive's employment hereunder for Cause as provided in this Section 6.2. If the Corporation terminates the Executive's employment hereunder for Cause, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the Date of Termination; (b) any deferred compensation (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay; and -6- 7 (c) reimbursement for expenses incurred, but not yet paid prior to such termination of employment; and (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. In any case described in this Section 6.2, the Executive shall be given written notice authorized by a vote of at least a majority of the members of the Board that the Corporation intends to terminate the Executive's employment for Cause. Such written notice, given in accordance with Section 6.7 of this Agreement, shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Executive's employment for Cause. The Executive shall be given the opportunity within 30 calendar days of the receipt of such notice to meet with the Board to defend such act or acts, or failure to act, and, if such act or failure to act is correctable, the Executive shall be given 30 business days after such meeting to correct such act or failure to act. If such act or failure to act is not correctable or upon failure of the Executive, within such latter 30 day period, to correct such act or failure to act, the Executive's employment by the Corporation shall automatically be terminated under this Section 6.2 for Cause as of the date determined in Section 1.5 of this Agreement. Anything herein to the contrary notwithstanding, if, following a termination of the Executive's employment by the Corporation for Cause based upon the conviction of the Executive for a felony involving actual dishonesty as against the Corporation or the Subsidiary, such conviction is overturned on appeal, the Executive shall be entitled to the payments and benefits that the Executive would have received as a result of a termination of the Executive's employment by the Corporation without Cause. 6.3. Termination Without Cause or Termination For Good Reason. The Corporation shall be permitted to terminate the Executive's employment hereunder without Cause and the Executive shall be permitted to terminate Executive's employment hereunder for Good Reason. For purposes of this Agreement, such a termination of employment by the Executive shall constitute a "Termination for Good Reason" only if effected in accordance with the notice provisions of Section 6.7(b). If the Corporation terminates the Executive's employment hereunder without Cause, other than due to death or Disability, or if the Executive effects a Termination for Good Reason, the Executive shall be entitled to receive: (a) the product of any annual bonus paid or payable (and annualized for any fiscal year consisting of less than 12 months) to Executive for the most recently completed fiscal year during the Term of Employment (unless in the case of termination by the Corporation without Cause, in which case, such product will be determined by reference to the highest annual bonus paid or payable under this Agreement during the Term of Employment)and a fraction, the numerator of which is -7- 8 the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365. (b) a lump sum payment in an amount equal to the present value of Base Salary owed through the later to occur of (i) the second anniversary of such termination, or (ii) the end of the Term of Employment; (c) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued vacation pay; (d) reimbursement for expenses incurred, but not paid prior to such termination of employment; and (e) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.4. Voluntary Termination. The Executive may effect a Voluntary Termination of Executive's employment hereunder. A "Voluntary Termination" shall mean a termination of employment upon 180 days prior written notice to the Corporation by the Executive on Executive's own initiative other than (a) a termination due to death or Disability, (b) a Termination for Good Reason, or (c) a termination due to Retirement. A Voluntary Termination shall not be, nor shall it be deemed to be, a breach of this Agreement and shall entitle the Executive to all of the rights and benefits which the Executive would be entitled in the event of a termination of Executive's employment by the Corporation for Cause. 6.5. Termination Due to Retirement. The Executive may terminate Executive's employment hereunder as a result of Retirement. If the Executive employment hereunder is terminated due to Retirement, the Executive shall be entitled to receive: (a) Base Salary at the rate in effect (as provided for by Section 5.1 of this Agreement) at the time of such termination through the date of Retirement; (b) any deferred compensation not yet paid to the Executive (including, without limitation, any interest on credits on such deferred amounts) and any accrued vacation pay; (c) reimbursement for expenses incurred but not yet paid prior to the date of Retirement; and -8- 9 (d) any other compensation or benefits which may be owed or provided to the Executive in accordance with the terms and provisions of any applicable agreements, plans and programs of or made by the Corporation and/or the Subsidiary. 6.6. No Mitigation; No Offset. In the event of any termination of employment under this Section 6, the Executive shall be under no obligation to seek other employment and there shall be no offset against any amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that the Executive may obtain. Any amounts due under this Section 6 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 6.7. Notice of Termination. Any termination of the Executive's employment by the Corporation for Cause, any Termination for Good Reason, and any termination of employment by the Executive in connection with a Voluntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 13.3 of this Agreement (the "Notice of Termination"). The Notice of Termination shall be given (a) in the case of a termination for Cause, within 90 business days after a director of the Corporation (excluding the Executive) has actual knowledge of the events giving rise to such purported termination, (b) in the case of a Termination for Good Reason, within 180 days of the Executive's having actual knowledge of the event or events constituting Good Reason; and (c) in the case of Voluntary Termination, not later than 150 days prior to the date of termination specified in such notice. Such notice shall (x) indicate the specific termination provision in this Agreement relied upon, (y) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, as applicable, and (z) if the termination date is other than the date of receipt of such notice, specify the date on which the Executive's employment is to be terminated (which date shall not be earlier than the date on which such notice is actually given). 6.8. Certain Further Payments by the Corporation. 6.8.1. Tax Reimbursement Payment. Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to the Executive by the Corporation, the Subsidiary or any other Affiliate (collectively, the "Covered Payments"), is or becomes, at any time, as a result of (a) any Internal Revenue Service claims or assertions, or (b) Section 6.8.2 below or otherwise, subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties, are hereinafter collectively, referred to as the "Excise Tax"), the Corporation shall pay to the Executive at the time specified in Section 6.9 below an additional amount (the "Tax Reimbursement Payment") such that after payment by the Executive of all taxes (including, without limitation, any interest or penalties imposed with respect to such taxes), including, -9- 10 without limitation, any Excise Tax, imposed on or attributable to the Tax Reimbursement Payment provided by this Agreement, the Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (a) the amount of the Excise Tax imposed upon the Covered Payments, and (b) an amount equal to the product of (i) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income, and (ii) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. 6.8.2. Determining Excise Tax. Except as otherwise provided in Section 6.8.1(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Corporation's independent certified public accountants (the "Accountants") or legal counsel reasonably acceptable to the Executive, deliver timely, upon the Executive's request, a written opinion, reasonably satisfactory to the Executive's legal counsel, to the Executive that the Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (i) do not constitute "parachute payments", (ii) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (iii) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (b) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.8.3. Applicable Tax Rates and Deductions. For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (a) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (b) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. -10- 11 6.8.4. Subsequent Events. If, pursuant to a written opinion, reasonably satisfactory to the Executive, of the Accountants (or legal counsel reasonably acceptable to the Executive) delivered to the Executive, the Excise Tax is subsequently determined on a reasonable basis and in good faith (other than as a result of a tax contest) to be less than the amount taken into account hereunder in calculating any Tax Reimbursement Payment made, the Executive shall repay to the Corporation the portion of any prior Tax Reimbursement Payment that would not have been paid if such redetermined Excise Tax had been applied in calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the mid-term discount rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the immediately foregoing sentence, if any portion of the Tax Reimbursement Payment to be refunded to the Corporation has been paid to any federal, state or local tax authority, repayment thereof shall not be required until an actual refund or credit of such portion has been made to or obtained by the Executive from such tax authority, and any interest payable to the Corporation shall not exceed the interest received or credited to the Executive by any such tax authority. The Executive shall be fully indemnified by the Corporation for any out- of-pocket costs, expenses or fees attributable to the filing of any refund or other claim. The Executive and the Corporation shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if any good faith claim for refund or credit from such tax authority made by the Executive is denied. Notwithstanding the immediately preceding paragraph, if, in the written opinion of the Executive's tax advisors delivered to the Accountants and the Corporation, the Excise Tax is later determined to exceed the amount taken into account by the Accountants or legal counsel, as the case may be, hereunder at the time any Tax Reimbursement Payment is made by reason of (i) manifest error, (ii) any payment the existence or amount of which could not be or was not determined or known about at the time of any Tax Reimbursement Payment, or (iii) any determination, claim or assertion made by any tax authority that the Excise Tax is or should be greater than the amount of such Excise Tax taken into account previously by the Accountants or legal counsel, as the case may be, or as otherwise previously determined, the Corporation shall make an additional Tax Reimbursement Payment in respect of such excess Excise Tax (which Tax Reimbursement Payment shall include, without limitation, any interest or penalties payable with respect to such excess Excise Tax) at the time specified in Section 6.9 below. With respect to this Section 6.8.4, if any such tax authority makes such a determination, the Executive shall notify the Corporation of such occurrence. If the Corporation obtains (at the Corporation's sole expense) an opinion of legal counsel reasonably satisfactory to the Executive that it is more likely than not that the Executive would succeed in disputing such claim, assertion or determination of such tax authority, the Executive shall, at the sole expense of the Corporation, make a good faith effort to contest such claim, assertion or determination of such tax authority in all relevant administrative proceedings with such tax authority and in any related judicial proceeding (excluding any appeals thereof); provided, however, that if the Executive determines in good faith that the continued contest of any such claim, assertion or determination with such tax authority would have an adverse impact on Executive's overall tax -11- 12 position (which good faith determination shall take into account the magnitude of the amounts involved), then, upon receipt of notice by the Corporation from the Executive to that effect, the Executive shall, without foregoing any right to receive any Tax Reimbursement Payment described in this Section 6.8, have no further obligation to pursue any such contest with any such tax authority. The Executive may, as a condition to pursuing or commencing any contest described in this Section 6.8.4 in any judicial proceedings (which proceedings shall be in a forum chosen at the sole discretion of the Executive), require the Corporation to advance any amount of tax required to be paid in order to pursue such contest. In conducting any contest described in this Section 6.8.4, the Executive shall use Executive's best efforts to keep the Corporation advised and will permit the Corporation to prepare and suggest appropriate responses and actions that may be reasonably made or taken by the Executive. Notwithstanding the above, the decisions as to such response or actions shall be solely that of the Executive and the Executive shall have the sole right to control the proceeding. The Corporation shall bear all expenses of any proceeding relating to any contest described in this Section 6.8.4, whether incurred by the Corporation or the Executive, including, without limitation, all fees and disbursements of attorneys, accountants and expert witnesses and any additional interest or penalties applicable. Nothing contained in this Agreement shall under any circumstances give the Corporation any right to examine the tax returns or any other records of the Executive. 6.9. Payment. Except as otherwise provided in this Agreement, and except with respect to continued payment of Base Salary in accordance with any provisions of this Agreement, any payments to which the Executive shall be entitled under this Section 6 shall be made as promptly as possible following (a) the Date of Termination, (b) the payment of any Covered Payments, or (c) the delivery of the opinion of the Executive's tax advisors, in accordance with Section 6.8.4. If the amount of any payment due to the Executive cannot be finally determined with 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Corporation and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any bonus or incentive plan or program provided or maintained by the Corporation, the Subsidiary or any other Affiliate and for which the Executive may qualify or be selected, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Corporation, the Subsidiary or any Affiliate, including, without limitation, any change of control agreements or any stock option or restricted stock agreements. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the -12- 13 Corporation, the Subsidiary or any other Affiliate at or subsequent to the Date of Termination shall be payable in accordance with such plans or programs. 8. Full Settlement. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others. 9. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, each of the parties hereto shall pay its own attorney fees and expenses incurred in connection with such dispute. In addition, each party shall pay its own legal fees and expenses incurred in connection with the preparation and negotiation of this Agreement. 10. Confidential Information and Noncompetition. 10.1. Confidential Information. The Executive shall not, during the Term of Employment and thereafter, without the prior express written consent of the Corporation or the Subsidiary, disclose any confidential information, knowledge or data relating to the Corporation, the Subsidiary or any other Affiliate and their respective businesses, which (a) was obtained by the Executive in the course of the Executive's employment with the Corporation, and (b) which is not information, knowledge or data otherwise in the public domain (other than by reason of a breach of this provision by the Executive), unless required to do so by a court of law or equity or by any governmental agency or other authority. In no event shall an asserted violation of this Section 10.1 constitute a basis for delaying or withholding the payment of any amounts otherwise payable to the Executive under this Agreement. 10.2. Noncompetition. If the Executive terminates Executive's employment hereunder pursuant to Section 6.4 of this Agreement, or if the Corporation terminates Executive's employment hereunder pursuant to Section 6.1 or 6.2, then the Corporation, by written notice given to the Executive within 30 days after the Executive delivers a Notice of Termination in connection with a Voluntary Termination, may require that this Section 10.2 apply, subject to the Corporation complying with its obligations under this Agreement.. If the Corporation gives notice to the Executive as provided in the preceding sentence, then the Executive, without the express written consent of the Corporation, shall not, for the twelve month period following the Date of Termination, engage in any business, whether as an employee, consultant, partner, principal, agent, representative or stockholder (other than as a stockholder of less than a 5% equity interest) or in any other corporate or representative capacity, if it involves engaging in, or rendering services or advice pertaining to, any lines of business the Corporation or the Subsidiary was actively conducting on the Date of Termination. If the Corporation shall institute any action or proceeding to enforce the provisions of this Section -13- 14 10.2, or shall file any claim in any proceeding to enforce such provisions, the Executive hereby waives the claim or defense that the Corporation has an adequate remedy at law and waives the requirement that the Corporation post a bond in securing equitable relief, and the Executive shall not contend in any such action or proceeding the claim or defense that an adequate remedy at law exists. 11. Successors. 11.1. The Executive. This Agreement is personal to the Executive and, without the prior express written consent of the Corporation, shall not be assignable by the Executive, except that the Executive's rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition; intestate succession or pursuant to a domestic relations order of a court of competent jurisdiction. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, beneficiaries and/or legal representatives. 11.2. The Corporation. This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors and assigns. The Corporation shall require any successor to all or substantially all of the business and/or assets of the Corporation or the Subsidiary, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform if no such succession had taken place. 12. Miscellaneous. 12.1. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. 12.2. Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12.3. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: G. Michael Dees Marisa Christina, Inc. 1410 Broadway New York, New York 10018 -14- 15 If to the Corporation: Marisa Christina, Incorporated 8101 Tonnelle Avenue North Bergen, New Jersey or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. 12.4. Withholding. The Corporation may withhold from any amounts payable under this Agreement such federal, state or local income taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12.5. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 12.6. Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 12.7. Beneficiaries/References. The Executive shall be entitled to select (and change) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Corporation written notice thereof. In the event of the Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to other beneficiary(ies), estate or Executive's legal representative(s). 12.8. Entire Agreement. Upon the commencement of the Term of Employment, this Agreement will contain the entire agreement between the parties concerning the subject matter hereof and will supersede all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect to the subject matter hereof, including the Old Employment Agreement, which is hereby terminated, discharged and released, but excluding (a) the Director Indemnification Agreement dated as of June 30, 1994, by and between the Corporation and the Executive, and (b) the non-competition agreement, dated July 1, 1993, between Subsidiary and Executive. 12.9. Representation. The Corporation represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between the Corporation and any other person, firm or organization or any applicable laws or regulations. -15- 16 12.10. Survivorship. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement or the Executive's employment hereunder to the extent necessary to the intended preservation of such rights and obligations. 13. Arbitration. (a) Any controversy arising out of or relating to this Agreement shall be settled by arbitration in New York pursuant to the rules of the American Arbitration Association, and judgment may be entered in any Court having jurisdiction. (b) The parties consent to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with arbitration, including the entry of judgment on any award; and consent that any process, notice, motion or other application to either of said courts, and any papers in connection with arbitration, may be served by registered or certified mail, return receipt requested, by personal service, or in such other manner as may be permissible under the rules of the applicable court or arbitration tribunal, provided a reasonable time for appearance is allowed. (c) The arbitrators shall have no power to alter or modify any express provision of this Agreement, or to render an award which has the effect of altering or modifying any express provision hereof, provided, however, that any application for reformation of this Agreement shall be made to the arbitrators and not to any Court, and the arbitrators shall be empowered to determine whether valid grounds for reformation exist. (d) Any arbitration proceeding must be instituted within one year after the claimed breach occurred, and a party's failure to institute arbitration proceedings within such period shall constitute an absolute bar to the institution of any proceedings by said party and a waiver of such claimed breach. Notwithstanding any law or rule to the contrary, the determination of whether said one-year period has expired shall be made by the Court and shall not be within the jurisdiction of the arbitrators. (e) The Executive or the Corporation, as the case may be, may be awarded all reasonable attorneys' fees and expenses incurred by the Executive or the Corporation, as the case may be, in connection with any arbitration or court proceeding arising out of this Agreement, in the arbitrators' discretion. (f) In the event that any dispute arising under this Agreement shall be submitted to arbitration pursuant to this Section 13, the Executive shall be entitled to receive all compensation, bonuses, benefits and perquisites contemplated by this Agreement during the pendency of any such proceedings unless the Corporation shall place the disputed amount into an interest-bearing escrow account with the Corporation's attorneys, the terms of which -16- 17 escrow shall provide that all escrowed funds shall be immediately distributed to the party or parties entitled thereto immediately upon a determination of the arbitrators which is final, confirmed, and not subject to appeal. -17- 18 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. EXECUTIVE ----------------------------------- G. Michael Dees MARISA CHRISTINA, INCORPORATED MARISA CHRISTINA APPAREL, INC. By ------------------------------- Its ------------------------------- -18- EX-10.13.B 6 EMPLOYMENT AGREEMENT: Z. SOLOMON 1 ADRIENNE VITTADINI ENTERPRISES, INC. 575 Seventh Avenue New York, New York 10018 March 28, 1998 Mr. Zachary Solomon 375 West End Avenue Apartment 2A New York, NY 10024 Dear Mr. Solomon: This letter confirms our mutual agreement as to your employment by Adrienne Vittadini Enterprises, Inc. (the "Company") in the position of President and Chief Executive Officer commencing as of your acceptance of this letter and terminating on December 31, 1999. As President and Chief Executive Officer, you shall have the duties, responsibilities and authorities normally associated with that office and agree that you will devote all of your business time and efforts in the performance of the duties associated with this position. Your services shall be rendered primarily at the Company's principal Manhattan premises, and your office shall be located there. You shall not be required to perform duties other than of a senior executive nature, commensurate with your title. Your duties will not require that your principal residence be outside of the New York City metropolitan area. During the term of your employment as hereinafter set forth, you shall receive a salary in the amount of Five Hundred Thousand ($500,000) Dollars per annum. You shall also be entitled to receive a bonus for services performed by you during the term of your employment. The terms and conditions of such bonus are as follows: for the year 1998, a bonus, if any, shall be at the sole discretion of the Company; for the year 1999, a bonus, if any, shall be at the sole discretion of the Company; however, in the event that the earnings before interest and taxes ("EBITDA") of the Company is equal to or greater than a "break even" then you will be entitled to a bonus equal to twenty-five (25%) percent of your annual salary, or One Hundred Twenty-Five Thousand ($125,000) Dollars. 2 EBITDA of the Company shall be determined by the independent accounting firm regularly engaged by Marisa Christina, Inc. ("MRSA") to audit MRSA, in accordance with generally accepted accounting principles, except that in making such determination the following shall be excluded: (i) any bonus paid or payable to you; (ii) any gain or loss on the sale of assets (other than inventory in the ordinary course of business); (iii) any inter-company payments made by the Company in the nature of management or royalty fees, or in the nature of overhead allocation; (iv) any charges to earnings resulting from the purchase of another business by the Company subsequent to the date hereof; (v) any payments to the prior owners of the Company in the nature of contingent purchase price payments; and (vi) depreciation and amortization of good will relating to the acquisition of certain assets from Adrienne Vittadini, Inc. (any other depreciation and/or amortization shall be included). Bonus payments shall be made as promptly as practical, but in any event by the date on which bonus payments are made to other executives of the Company. During your term of employment, MRSA shall nominate, or cause its Board of Directors to nominate, you for election to the Board of Directors of MRSA, and, if elected, you agree to serve as a director of MRSA without additional consideration. You shall be entitled to the benefits of any and all indemnification provisions afforded to other members of the Board of Directors of MRSA, whether by insurance, contract or otherwise. As additional consideration, you shall be entitled to receive stock options to purchase One Hundred Thousand Shares (100,000) of MRSA at Five Dollars ($5.00) per share (the "Options"). The Options shall begin to vest on the day of commencement of your employment with the Company, and for purposes of the vesting of the Options, you shall be deemed to have completed a year's service on every December 31st of each year thereafter -2- 3 during which you are employed by the Company. The Options shall be subject to MRSA's Incentive Stock Option Agreement, a copy of which is annexed hereto. During the term of your employment, you shall be entitled to receive all benefits offered by the Company in the nature of health, disability and travel insurance. Such benefits offered to you shall be commensurate with such benefits traditionally offered to an executive in your position. You shall be entitled to reimbursement of all reasonable business travel, entertainment and similar expenses incurred during your employment. This agreement can be terminated by the Company at any time for Cause and in such event you shall not be entitled to any further benefits under this agreement other than what has already been paid and granted you as provided herein. "Cause" shall be defined as: (a) an action or failure to act by you constituting willful malfeasance or nonfeasance which has a material adverse effect on the Company; or (b) your being convicted of, or pleading nolo contendere to, a felony. Prior to the Company's termination of your employment for Cause, it shall: (a) provide you with written notice, specifying in reasonable detail the act(s) or failure(s) to act complained of; and (b) afford you the opportunity (together with counsel, if you so desire) to meet personally with the Board of Directors of MRSA to discuss same. In the event that this agreement is terminated by the Company other than for Cause hereunder (as opposed to the agreement expiring on its own terms on December 31, 1999, in which event there shall be no severance), you shall be entitled to the following severance: (a) if terminated before December 31, 1998, you shall be entitled to the remainder of your full salary through December 31, 1999; and (b) if terminated subsequent to December 31, 1998, you shall be entitled to Five Hundred Thousand ($500,000) Dollars (one year's salary). -3- 4 In the event that the Company notifies you, in writing, on or before October 1, 1999 that it does not intend to renew this agreement, your employment with the Company shall cease on December 31, 1999, and you shall not be entitled to any further salary as of December 31, 1999. In the event of your termination other than for Cause, the Company will, at your option upon written notice, pay you the aggregate of all such amounts in a lump sum. In addition, in such event, the Company shall immediately pay to you any previously unpaid salary, bonus or other compensation, and shall reimburse you for any un-reimbursed expenses. You shall not be required to seek or accept other employment or otherwise mitigate the Company's damages in order to be entitled the severance specified herein. Any dispute arising out of or relating to this agreement shall be resolved by arbitration before the American Arbitration Association in the City of New York before a panel of three arbitrators. The arbitrators shall award reasonable attorneys' fees to the prevailing party. This contract calls for the provision of personal services by you and the Company may not assign this contract or any of its obligations hereunder, in whole or in any part, by operation of law or otherwise, to any person or entity without your prior express written consent; and any change in control of the Company shall constitute such an assignment. Any amendments or changes to this contract must be in writing, signed by all parties, to be effective. This contract shall be governed by, and interpreted in accordance within the internal laws of the State of New York applicable to contracts to be wholly performed within such State, without reference to conflict of laws provisions. By its signature below, MRSA is guaranteeing all obligations of the Company under this Agreement; such guaranty is a guaranty of performance and not of payment, and you may proceed directly against MRSA without having to make any claim against the Company; the parties confirm that such guaranty is a material inducement to you to enter into this contract, and may not be revoked or modified by MRSA. If this letter correctly reflects our agreement, please sign this letter and return it to me. Very truly yours, ADRIENNE VITTADINI ENTERPRISES, INC. By:_________________________________ Adrienne Vittadini Chairman of the Board -4- 5 ACCEPTED AND AGREED TO: ___________________________ Zachary Solomon AGREEMENT GUARANTEED BY MARISA CHRISTINA, INC. By:________________________ -5- EX-23 7 CONSENT OF KMPG PEAT MARWICK LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Marisa Christina Incorporated: We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-91078) and Form S-8 (No. 33-91080) of Marisa Christina, Incorporated of our report dated March 8, 1998, relating to the consolidated balance sheets of Marisa Christina, Incorporated and subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Marisa Christina, Incorporated. KPMG PEAT MARWICK LLP New York, New York March 27, 1998 EX-27 8 FINANCIAL DATA SCHEDULE: FOR Y/E 12/31/1997
5 This schedule contains summary information financial information for Marisa Christina, Incorporated's Consolidated Balance Sheets as of December 31, 1997 and the Consolidated Statement of Operations for the year then ended and is qualified in its entirety by reference to the Company's Form 10-K for the year ended December 31, 1997. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,007,153 0 9,374,706 (200,104) 12,006,285 29,439,210 5,781,519 (2,595,115) 65,196,781 17,498,360 0 0 0 85,868 47,109,279 65,196,781 91,400,058 91,400,058 (71,235,897) (30,911,860) 0 (353,660) (451,650) (8,979,552) 2,987,528 (5,992,024) 0 0 0 (5,992,024) (0.72) (0.72)
EX-27.2 9 FINANCIAL DATA SCHEDULE: RESTATED FOR Y/E 12/31/96
5 This schedule contains summary information financial information for Marisa Christina, Inc.'s Consolidated Balance Sheets as of December 31, 1996 and the Consolidated Statement of Earnings for the year then ended and is qualified in its entirety by reference to the Company's Form 10-K for the year ended December 31, 1996. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,004,094 0 15,120,974 (73,344) 10,097,123 29,333,530 4,817,052 (2,144,229) 66,199,933 11,707,146 0 0 0 85,868 54,128,919 66,199,933 115,536,726 115,536,726 (75,584,880) (29,777,439) 0 (309,774) (918,189) 11,920,367 (4,543,826) 7,376,541 0 0 0 7,376,541 (0.87) (0.86)
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